The happy Cayman Islanders do not pay income tax — or corporation tax, or taxes on capital gains, if they have any. A tariff on imports suffices for their government’s modest needs. This idyllic existence is now under threat, as richer and more powerful countries declare war on tax havens, with our own government leading the charge.
For the Prime Minister, this was a topic his guests could agree on when he played host to the Group of Eight in July. The Chancellor followed up with the Group of 20 finance ministers, and a plan of campaign has been commissioned from the grandly named Organisation for Economic Co-operation and Development, representing 34 “advanced” economies, but not, of course, the Caymans.
The OECD is something of a tax haven itself. It lives in its own well-stocked chateau in Paris, and enjoys diplomatic status and the friendly tax regime that comes with this. Its member countries have their own embassies, with the same status. This survivor from the postwar years was originally set up to administer Marshall Aid. Later, Nigel Lawson complained that it had outlived its usefulness and that its ministerial meetings were a waste of time and money — but such institutions are bound to seek new ways to keep themselves financed and occupied. Going after tax havens is one of them.
It plays well. Advanced economies can always use more of their taxpayers’ money — we work for the chancellor until the end of May, and after that he borrows — so they are sensitive to the idea that some other economy may be undercutting their tax base. This fear is sometimes voiced by the European Commission, which enjoys its own light tax regime but likes to prescribe to its members. It warns them against “harmful tax competition”.
To any cartel, competition is harmful, but that is not how the customers see it. Competition and choice, as they know, work in their favour and are the spurs to efficiency. Governments, and indeed the Commission, are quick to enforce competition on others, but they themselves exemplify Lord Mancroft’s rule: monopolies (he said) are like babies — nobody likes them until they’ve got one of their own.
So now we see our own government looking for ways to stamp out tax competition or at least cut it down to size. If small countries with few natural resources — an island in the Irish Sea, perhaps, or in the Caribbean — hit upon new advantages and find a market for them, they must be bullied until they desist. The Isle of Man can go back to exporting kippers while the Caymans try their luck with sea salt.
Chancellors are always tempted to parade themselves as tax enforcers. Not a budget speech goes by without a crackdown on loopholes (the preferred phrase) written into it. This is accompanied by a display of tax incentives, which soon enough are enlarged into loopholes. Gordon Brown inherited this approach and took it farther. He made the tax system more complex, so that his Finance Acts grew thicker and thicker, and he got his hands on the machinery of tax collection.
There had for a long time been two different machines: two agencies of the Crown, with different traditions. The Inland Revenue was professional and legalistic. The Customs and Excise had been rough and ready smuggler-busters. When Brown as Chancellor chose to amalgamate them, the Customs were widely perceived to have come out on top. He then moved the merged agency into the Treasury’s back office, where he could keep an eye on it. His instinct, as always, was for control.
Today’s Prime Minister and Chancellor have found his legacy useful. Their style is to deflect blame on to convenient scapegoats. If the economy stutters, that must be the fault of those profligate bankers, now sitting on their cash-boxes and failing to lend. If the public finances are slow to improve, that must be the fault of all those who should be paying tax but aren’t. So the taxmen must threaten middle-class tax avoiders — and as for big companies which could afford to pay more than they do, they must be blamed and named and shamed. The Treasury, no doubt, will have their details to hand.
As for the tax havens, what better scapegoats could there be? They are distant and mysterious, and presumably up to no good. Not since Harold Wilson blamed the “Gnomes of Zurich” for speculating against the pound in the 1960s has anyone fitted the bill so perfectly. So let the advanced economies gang up on them, and let the British government be seen to lead the way. The trick is to suggest a moral imperative if a legal one cannot be found.
In a famous 1929 tax case, the judge, Lord Clyde, ruled that there was no such imperative: “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or his property as to allow the Inland Revenue to put the largest possible shovel into his stores.” The Revenue, he said, quite rightly took every advantage afforded to it by the law, and the taxpayer was equally entitled to protect himself.
It would be something to post Lord Clyde’s judgment in the Treasury’s back office, or on the OECD’s walls, or even in St Petersburg, where the Group of 20 is due to meet next. Perhaps the Cayman Islands should adopt it.