Cash-hungry countries have encouraged the rise of tax havens

A desire to protect the oppressed, and generate revenue, has got us to here

Share

So why don’t the major countries do something about tax havens? Is it that they can’t, or might it just be that permitting tax havens to exist rather suits them?

The mood against tax havens is running hot and strong, fuelled by extreme examples of tax avoidance by multinationals and rich individuals, and the main governments, including our own, are pledged to do something about it. But, for most of us, the puzzle is that the whole system was allowed to grow up in the first place. We can just about understand why our racing drivers choose to live in Monaco but when multinationals flip their earnings through several different jurisdictions, with affiliates busy lending to each other, and end up paying hardly any tax – well, it does all seem a bit rum.

The easiest way to get one’s mind round this extraordinarily complex world is to divide it into two categories: tax havens for individuals; and tax havens for companies. Though the two blend into each other. Take individuals first.

There are really two forces that have pushed countries to create tax havens for people. One has been the desire to protect people fleeing from oppression. Thus the British “non-dom” status goes back to the Napoleonic Wars, when people were fleeing from the Continent. The Swiss banking secrecy was formalised in 1934 after the Nazis came to power, largely to enable Jewish people to get their money out and not be traced by the authorities in Germany. Both systems have been abused and belatedly are now being reformed, but the origins were honourable.

The other has been a simple quest for revenue. The Channel Islands, Andorra, Monaco and the like are all short of natural resources. Having a tax regime that is attractive to rich individuals is a way of exploiting one competitive advantage: the freedom to set tax rates. Again, there have been abuses, and there are downsides such as the impact on property prices (Monaco is prime London, doubled). But if people live in a place, they pay the local taxes. If they need to keep a log of their movements to prove they really live there, so be it.

For companies, it is more complicated. Governments around the world seek to attract investment. So they build foreign firms’ factories, give grants for training, pay for improved infrastructure and so on. For manufacturing, it was all fairly clear, though there have been abuses, where companies take the money, build their washing machines or whatever for a few years, then declare the business unprofitable and bunk out. While many of these incentives made little sense, the photo opportunity for a politician to open a factory in a marginal constituency proved a powerful driver.

But now much international investment is not in physical capital – a factory – but rather in financial and intellectual capital. So countries have developed elaborate schemes to attract these forms of capital, too. The Netherlands has focused on intellectual capital, which is why pop groups locate there. (Yes, pop music is intellectual capital.) Luxembourg has majored on financial capital, attracting fund managers – as indeed has Ireland. Cyprus had a huge offshore banking business, and the money there is now being eagerly courted by other eurozone centres.

If a government in an established democracy creates an incentive, it will attract business. The great advantage of luring financial and intellectual capital is that it is cheap to do so. Politicians may not get the kudos from opening the factory but they don’t have to stump up the funds to build it. Yet the host still gets tax revenue from the deal. The Netherlands, Luxembourg and Ireland are decent, established democracies. The problem is that the effect of these incentives is to deny revenue to other decent democracies.

The solution? There will, of course, have to be better coordination on this to check the most egregious examples of such manipulation – and there will be. But do not expect a revolution. Why else would both the present British Government and its predecessor boast about bringing down UK corporation tax rates to attract investment from other, more onerous jurisdictions? One country’s incentive is another country’s loophole.

What the Lloyds sale signifies

If you want to pick a moment when the banking crisis can be declared to have turned the corner, it will, I think, be when the first chunk of the Government’s investment in Lloyds Bank is sold back to the public. That day moved closer yesterday.

The bank is back in profit and commentators were reckoning that in the next few weeks the share price could reach the 63p price at which the Government bought its stake. Yesterday, the price was 54p. In terms of public finances, the sale is not important; in terms of perception of the health of banking, it is massively so.

So fingers crossed.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Guru Careers: Software Developer

£35 - 40k + Benefits: Guru Careers: We are seeking a Software Developer (JavaS...

SThree: Trainee Recruitment Consultant / Resourcer

£18000 - £23000 per annum + Commission: SThree: As a Trainee Recruitment Consu...

Ashdown Group: UI Developer - (UI, HTML, CSS, JavaScript, AngularJS)

£25000 - £40000 per annum: Ashdown Group: UI Developer - (UI, JavaScript, HTML...

Day In a Page

Read Next
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’  

Children's TV shows like Grange Hill used to connect us to the real world

Grace Dent
An Indian bookseller waits for customers at a roadside stall on World Book and Copyright Day in Mumbai  

Novel translation lets us know what is really happening in the world

Boyd Tonkin
Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine