Paradise palaver and the War on You

The Paradise Papers have exposed a bundle of liars and cheats. Namely, the politicians who wrote the tax rules that make using offshore tax havens legal. And not just because their own pension fund makes use of those loopholes.

The rules designed by politicians and their minions allow wealthy people to minimise taxes by keeping their investments overseas where tax rates are lower. If politicians had a problem with this, they would’ve changed the rules at some point in the last few hundred years.

But this week those same politicians and policymakers are all over the news declaring how outrageous the use of tax havens is. How can the people who are responsible for the rules decry them most of all? The outrage being manufactured by political leaders today is entirely disingenuous.

It’s nothing more than electioneering at its worst

Now, if the politicians are too stupid to close the tax loopholes they wail about, then how can we trust their framing of the whole story at all? Someone who creates the problem they are complaining about is deeply dishonest. But is there really a problem?

It’s odd that complying with international tax law is a moral crime. There are so many reasons other than minimising taxes to use international financial institutions that the whole point is mute in many cases.

Keeping your assets outside your home country is a basic part of diversification for anyone who can afford to do so. Britain benefits from this enormously. Our reputable rule of law and institutional stability meant we’ve been home to vast amounts of foreign capital for hundreds of years. The non-dom rules illustrate this nicely.

Not that Britain is ideal

Inheritance tax, for example, completely destroys Britain’s credibility as a safe place to keep your wealth. Imagine if the Queen’s estate had to hand over 40% of its holdings to the government when she dies. No, one rule applies to the royal family, another to its subjects.

Then there’s the infrastructure and other laws that different jurisdictions provide, taxes aside. Trust law, corporate law, costs, compliance, convenience, double taxation agreements and much more contributes to why people use offshore wealth havens. There’s a surprising amount of variety between different nations on such features.

The main reason offshore centres outcompete on these issues is the stupid laws of places like the US and EU, which many people are stuck with. Managing wealth in these places is extraordinarily difficult because of regulation. It took me weeks of trying to open a bank account in the UK. By operating out of a tax haven, you can service a bigger list of clients in a bigger list of locations without having to comply with all their stupid laws.

Which means lower costs

I spent days researching tax havens thanks to my constant international travels for three years and the administrative nightmare this presents. At my level of income, the reason for using such a haven entirely came down to convenience and not breaking any laws inadvertently. I don’t know if you’ve ever looked into Thai tax law?

Not to mention, if you’re the head of state of several tax havens, like the Queen is, keeping big chunks of your wealth there seems like a pretty reasonable idea.

So there are plenty of reasons to use tax havens. But in the end, tax minimisation is the dominant reason. Is that wrong?

Trying to keep as much of the money you’ve earned as possible seems to be a rather normal motivation we all share. Especially those of us who have saved money to invest in the first place. If you have enough of it, diversifying internationally to save on taxes is just a common sense move no different to using deductions and trusts.

Paradise Papers for everybody

In fact, most of us are probably minimising taxes by using international tax havens, with the same level of awareness as the Queen. Your pension fund, ISA, funds you invest in and many other investments probably have a link to one of the tax havens identified in the Paradise Papers. And you probably own shares in companies that minimise taxes using those havens too, often without realising.

Tax minimisation through international diversification is so institutionalised that it’s available to all of us. And we don’t even know when we’re using it.

Perhaps the best explanation for tax minimisation comes from Down Under. Australia’s wealthiest person at the time, Kerry Packer, appeared before the print media committee hearing in 1991. The panel of politicians accused him of trying to pay as little tax as possible. He replied that “of course” he did.

There’s nothing wrong with minimising tax. I don’t know anybody that doesn’t minimise their tax. […] I’m not evading tax in any way shape or form. Now, of course I’m minimising my tax. And if anybody in this country doesn’t minimise their tax they want their heads read. Because, as a government, I can tell you, you’re not spending it that well that we should be paying extra.”

And there you have it. The government is so bad at spending your money that you’re better off keeping it out of their hands.

A more sophisticated way of putting the same argument comes from the economist Ludwig von Mises: “Capitalism breathes through [tax] loopholes”. Without them, our ability to invest and create companies and products like Google, Apple and Amazon would be inhibited.

In the midst of all this, one thing seems lost. When you bring home any money from these havens, you have to pay tax on it. Holding money in offshore tax havens presents and enormous amount of potential tax to be paid if Britain fixes its stupid tax laws and makes bringing the money home a sensible course of action.

Once again, the politicians will fail us.

The real tax dodgers

The war between technology companies and the EU is hotting up. The EU’s competition commissioner, which is one of the funniest political titles ever, sent a barrage of criticisms at Apple, Google and Amazon in a speech.

The funny thing is, when it actually comes to legally challenging these companies, the EU discovers they have surprising allies. The Financial Times explains how it’s its host countries like Luxembourg and Ireland which make a stand:

Last month, the European Commission’s competition watchdog ordered Amazon to pay €250m in back taxes in Luxembourg for benefiting from illegal state aid. Amazon and Luxembourg have long denied any wrongdoing and could appeal against the ruling.

It also said it would force Ireland to collect €13bn in taxes owed by Apple by taking the case to the European Court of Justice. Apple is appealing against the commission’s move while Ireland called the decision “regrettable”.

Illegal state aid? Forcing a country to collect taxes? Doesn’t sound like capitalism and tax evasion are the problem here… And it doesn’t sound like the rule of law is clear enough for policymakers to be targeting companies in the media.

The real tax dodgers are the countries providing the low tax environments. Democracy and clever policy-making in places like Bermuda, Luxembourg and Ireland is the key to this issue.

If the EU wants to take a stand against tax havens, it will have to take a stand against national sovereignty and democracy. Again…

The coming crackdown in the War on You

The Paradise Papers are just the sort of justification a tax crusader needs. Some of the proposals already being considered are terrifying.

Take for example the wealth tax. Rather than being taxed on your income, you could be taxed on your wealth. The trouble here is that wealth is a subjective matter on most assets.

Is wealth determined by market values, income earning potential of assets, arbitrary valuations, or some other measure? Any choices you make will dramatically alter the incentives of owning various assets, completely uprooting entire asset markets and destroying businesses and wealth. It also determines how your economy will develop in the future. Good luck writing the policy…

The very incentive to save money disappears if we tax wealth. Living paycheque to paycheque becomes optimal tax planning. Changing tax law to suit people who live this way seems an odd way to go.

The requirement to declare your wealth to the government presents a terrible administrative challenge too. Ask anyone who has dealt with the Child Support Agency about this and you’ll see their face turn multiple colours in short order. The government’s ability to declare wealth into existence that does not exist is already operating in that environment.

Taxing wealth meltdown

A tax on wealth can be extraordinarily destructive for those who are asset rich but income poor. They could have to sell assets at inappropriate times to meet tax bills their income doesn’t cover.

Imagine having been taxed on the value of your shares and property in the lead-up to 2006, only to retire in the midst of the global financial meltdown that followed. You’d have paid taxes on absurdly inflated values, only to discover their real value when you needed it was vastly lower.

Of course, a wealth tax would lead to vast amounts of wealth suddenly disappearing into proper tax havens, never to be seen or heard from again. A government policy never achieves its aims.

It’s not just wealth taxes that the Paradise Papers might trigger the justification for. Transactions taxes are already being discussed at the Labour Party and in the EU. Taxing transactions rather than profits makes it far harder to hide your profits. But it disadvantages high volume, low margin businesses. And those are the ones that benefit consumers most by delivering lots of goods and services at low prices. Something the EU thinks is unfair to its local, more expensive and less popular competitors.

The good news, as Princess Leia from Star Wars put it, is that “The more you tighten your grip, Tarkin, the more star systems will slip through your fingers.” The more tax authorities squeeze, the more places they create to hide.

Boaz Shoshan is working on a series of reports to show you how to hide from government crackdowns like the ones the Paradise Papers might “justify”. They were inspired by “The War On You” conference, which you can access here.

More on Boaz’s scheming next week.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Economics

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