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									The Never-Ending
Assault on International
Financial Centres
          International Funds Conference
          Cayman Islands, January 14, 2010
Issues to Discuss
 Why is the ―offshore‖ world being
 attacked?
 Why do the goal posts keep moving?
 The ―practical‖ reason the attacks will
 never end.
 The ―ideological‖ reason the attacks will
 never end.
There Is a Simple Explanation
 Asked why he
 robbed banks, Willie
 Sutton remarked,
 ―that’s where the
 money is.‖
 Some – if not most
 – politicians have
 the same attitude
 about ―tax havens.‖
America’s Dismal Fiscal Situation
   In just eight years, President Bush increased
   the budget from $1.8 trillion to $3.5 trillion.
   President Obama promised ―hope and
   change,‖ but is doing the same thing.
   In his first few months, $800 billion of so-
   called stimulus.
   Hundreds of $billions of new spending in his
   first budget.
   Government-run health care?!?
Catching Up to Europe?
Today, the burden of the federal government
is about 26 percent of GDP, up from 18.5
percent of GDP when Clinton left office.
The ―good news‖ is that spending is artificially
high because of financial sector bailouts and
the recession, meaning the ―baseline‖ level of
federal government spending is about 23
percent of GDP.
The depressing news is the long-run budget
outlook.
                   Share of GDP




       0%
            10%
                  20%
                        30%
                              40%
                                    50%
                                          60%
1900
1908
1916
1924
1932
1940
1948
1956
1964
1972
1980
1988
1996
2004
2012
2020
2028
2036
2044
                                                The Federal Government Has Been Growing...




2052
2060
2068
2076
The Calm Before the Storm
   Because of Social Security, Medicare, and
   Medicaid, federal spending is projected to
   jump from 22 percent-plus of GDP today to
   45 percent-67 percent of GDP after the baby
   boom generation is fully retired.
   State and local governments will consume –
   at a minimum – another 15 percent of GDP.
   America’s welfare state will be bigger than
   what France has today.
                  Share of GDP




       0%
            10%
                  20%
                        30%
                              40%
                                    50%
                                          60%
1900
1908
1916
1924
1932
1940
1948
1956
1964
1972
1980
1988
1996
2004
2012
                                                …But Soon Will Explode




2020
2028
2036
2044
2052
2060
2068
2076
Battling the CEN Ideology
   Opponents of tax competition and ―tax
   havens‖ are motivated by an ideological belief
   in the theory of capital export neutrality
   (CEN), which holds that all tax planning
   (avoidance or evasion) must be eliminated.
   According to the theory, economic efficiency
   is maximized when people make decisions in
   a world of identical tax rates.
   At the very least, this requires worldwide
   taxation.
The Added Problem of Haig-Simons
  The Haig-Simons theory of taxation presumes
  it is good to double tax income that is saved
  and invested.
  In other words, tax both income and changes
  in net worth.
  This requires tracking capital, not only
  domestically but also internationally.
  To be comprehensive, the Haig-Simons
  system requires worldwide taxation.
Threats from the United States
   A rejuvenated OECD anti-tax
   competition campaign, particularly with
   Democrats controlling Congress and the
   White House.
   American support for expanded savings
   tax directive.
   Anti-tax haven legislation in the US,
   such as the Levin/Obama proposal and
   Dorgan/Obama proposal.
Obama’s Demagoguery
                More than 12,000
                companies are
                registered at Ugland
                House, and Obama
                says it is ―either the
                biggest building in
                the world or biggest
                tax scam in the
                world.‖
Cayman Islands vs. Delaware
The OECD’s New Offensive
  At the recent Global Tax Forum in Mexico, the
  OECD rejuvenated its campaign against tax
  avoidance and other forms of legal tax
  planning.
  Opponents of tax competition generally have
  claimed that the goal is to eliminate tax
  evasion, but the theory used by the OECD –
  capital export neutrality – ultimately leads to
  full tax harmonization.
The Mexico City Surprise
   At the recent Global Tax Forum in Mexico, the
   OECD tried to insert report language
   broadening its supposed mandate.
     They sought to add the following clause: ―In the
     context of the broader effort to fight tax evasion
     and avoidance and to remove harmful tax
     practices that facilitate such activities, the main
     objectives of the meeting are…‖
   The bureaucrats were unsuccessful, but they
   will not give up.
The Next Steps for the Statists
   The OECD also has announced steps to
   persecute high-net-worth individuals with
   greater monitoring and demands for advance
   reporting of activities.
   The European Commission is proposing to
   dramatically expand the savings tax directive,
   with a goal of automatic information sharing
   for all forms of capital income .
   The expanded EUSTD would apply to
   individuals and entities.
The Next Steps for the Statists
   The European Commission is pushing to
   harmonize the definition of corporate taxable
   income – the so-called CCCTB, and the left
   more broadly wants worldwide formula
   apportionment.
   The OECD is expanding the so-called Global
   Tax Forum to include more anti-tax
   competition jurisdictions.
   We also can expect renewed efforts to curtail
   international company formation and open
   shipping registries.
How Should Cayman Protect Itself?
   First, realize that you are in a
   protracted battle for survival.
   Second, realize that you wear the white
   hats and Sarkozy, Merkel, Brown, and
   Obama wear the black hats.
   Third, understand that every concession
   you make simply whets the appetite of
   your enemies.
Don’t Feed an Alligator
He’ll Want Another Meal
Tomorrow…and Bring a Friend
Curtailing the Welfare State
   How do we stop these terrible predictions
   from becoming a reality?
   ―Public Choice‖ makes spending restraint a
   political challenge.
   At a minimum, spending should grow slower
   than GDP, causing the burden of government
   to fall over time.
   Some nations have been successful with
   dramatic spending restraint.
Can We Elect Good People?
 How often is there a Ronald Reagan – or
 even a Bill Clinton – in the White House?
 How often are there people like Phil Gramm
 and Dick Armey in the House and Senate?
 Will good people ever have a controlling
 majority?
 And if good people get power, how do we
 avoid Lord Acton’s dilemma?
Washington Is a Cesspool…
…that Becomes a Hot Tub




   (accessories not included)
The Solution Is Tax Competition
   When taxpayers have the ability to shift
   economic activity to lower-tax jurisdictions –
   and benefit from the better policy in those
   jurisdictions.
   This forces governments to lower tax rates
   and reform tax regimes to attract (or prevent
   the loss of) economic activity.
   Globalization is closely linked to tax
   competition.
The Reason Tax Rates Have Fallen
   Even though the political system encourages
   bad policy, politicians are moving tax law in
   the right direction.
   26 flat tax nations.
   Top income tax rates have dropped 26
   percentage points.
   Corporate tax rates have dropped by more
   than 20 percentage points.
   Significant reductions in double taxation.
Average OECD Top Tax Rates
                                       70
Average top tax rate in OECD nations




                                       60




                                       50




                                       40
                                            1980   1985   1990   1995   2000   2004
Falling Corporate Tax Rates
   Average corporate tax rate in 1980 = 48
   percent.
   Average corporate tax rate in 1990 = 42
   percent.
   Average corporate tax rate in 2000 = 34
   percent.
   Average corporate tax rate today = 26
   percent.
   America is now an outlier on corporate tax.
     Growing List of Flat Tax Nations
30




0
     1987   1992   1997   2002   2007   2008   2009
The Expanding Flat Tax Club

  Jersey        1940   20 Percent   Hong Kong           1947   15 Percent
  Guernsey      1960   20 Percent   Jamaica             1985   25 Percent
  Estonia       1994   21 Percent   Latvia              1995   25 Percent
  Lithuania     1996   24 Percent   Russia              2001   13 Percent
  Slovakia      2004   19 Percent   Ukraine             2004   15 Percent
  Iraq          2005   15 Percent   Romania             2005   16 Percent
  Georgia       2005   12 Percent   Trinidad & Tobago   2006   25 Percent
  Pridnestrovie 2006   10 Percent   Kazakhstan          2007   10 Percent
  Mongolia      2007   10 Percent   Kyrgyzstan          2007   10 Percent
  Macedonia 2007       10 Percent   Montenegro          2007   15 Percent
  Mauritius     2007   15 Percent   Bulgaria            2008   10 Percent
  Albania       2008   10 Percent   Czech Republic      2008   15 Percent
  Fed. B&H 2009        10 Percent   Belarus             2009   12 Percent
Policy Now Moving the Other Way
  Obama has proposed higher income taxes,
  payroll taxes, death taxes, and increased
  double taxation of dividends and capital
  gains.
  He also has proposed a big energy tax.
  And taxes to finance government-run
  healthcare.
  The long-term threat is a value-added tax.
  Will Obama give us tax reform?
The Barack Obama Flat Tax



                 What did you
                 make last year?
                 Send it in
Higher Tax Rates Will Backfire
High tax rates reduce incentives to engage in
productive behavior, meaning less work,
saving, investment, and entrepreneurship.
This means less taxable income.
To determine the impact of a tax policy change
on tax revenue, which effect dominates: The
rate change or the change in taxable income.
Obama will experience revenge of the Laffer
Curve.
Tax Rates, the Rich, and Revenue
   In 1980, there were
   116,800 rich people.
   Those rich people
   reported $36.2
   billion of income to
   the IRS.
   They paid $19.0
   billion of income tax
   to the federal
   government.
Tax Rates, the Rich, and Revenue
   In 1980, there were     By 1988, there were
   116,800 rich people.    723,700 rich people.
   Those rich people       Those rich people
   reported $36.2          reported $353.0
   billion of income to    billion of income to
   the IRS.                the IRS.
   They paid $19.0         They paid $99.7
   billion of income tax   billion of income tax
   to the federal          to the federal
   government.             government.
George Stigler and Gary Becker
  Stigler: ―Competition among communities
  offers not obstacles but opportunities to
  various communities to choose the type and
  scale of government functions they wish.‖
  Gary Becker: "...competition among nations
  tends to produce a race to the top rather
  than to the bottom by limiting the ability of
  powerful and voracious groups and politicians
  in each nation to impose their will at the
  expense of the interests of the vast majority
  of their populations.―
James Buchanan and Milton Friedman
    James Buchanan: "...tax competition among
    separate units...is an objective to be sought
    in its own right.―
    Milton Friedman: "Competition among
    national governments in the public services
    they provide and in the taxes they impose is
    every bit as productive as competition among
    individuals or enterprises in the goods and
    services they offer for sale and the prices at
    which they offer them."
Vernon Smith
 ―[Tax competition] is a very good thing.
 …Competition in all forms of government policy is
 important. That is really the great strength of
 globalization …tending to force change on the
 part of the countries that have higher tax and also
 regulatory and other policies than some of the
 more innovative countries. …The way to get
 revenue is doing all you can to encourage growth
 and wealth creation and then that gives you more
 income to tax at the lower rate down the road.‖
Edward Prescott
―With apologies to Adam Smith, it’s fair to say
that politicians of like mind seldom meet
together, even for merriment and diversion,
but the conversation ends in a conspiracy
against the public, or in some contrivance to
raise taxes. This is why international
bureaucracies should not be allowed to create
tax cartels, which benefit governments at the
expense of the people.‖
Edmund Phelps
  ―[I]t’s kind of a shame that there seems to be
  developing a kind of tendency for Western
  Europe to envelope Eastern Europe and require
  of Eastern Europe that they adopt the same
  economic institutions and regulations and
  everything. …We want to have some role
  models... If all these countries to the East are
  brought in and homogenized with the Western
  European members then that opportunity will be
  lost.
What Does Adam Smith Say?
An inquisition into every man’s private
circumstances, and an inquisition which, in order
to accommodate the tax to them, watched over
all the fluctuations of his fortunes, would be a
source of such continual and endless vexation as
no people could support…. The proprietor of
stock is properly a citizen of the world, and is
not necessarily attached to any particular
country. He would be apt to abandon the
country in which he was exposed to a vexatious
inquisition, in order to be assessed to a
burdensome tax, and would remove his stock to
some other country where he could…
Adam Smith…Continued
…either carry on his business, or enjoy his
fortune more at his ease. By removing his stock
he would put an end to all the industry which it
had maintained in the country which he left.
Stock cultivates land; stock employs labour. A
tax which tended to drive away stock from any
particular country would so far tend to dry up
every source of revenue both to the sovereign
and to the society. Not only the profits of stock,
but the rent of land and the wages of labour
would necessarily be more or less diminished by
its removal. —Adam Smith, An Inquiry into the
Nature & Causes of the Wealth of Nations, 1776.
Even OECD Economists Admit…
  OECD economists have written that ―the ability
  to choose the location of economic activity
  offsets shortcomings in government budgeting
  processes, limiting a tendency to spend and tax
  excessively.‖
  OECD economists note that ―legal tax
  avoidance can be reduced by closing loopholes
  and illegal tax evasion can be contained by
  better enforcement of tax codes. But the root
  of the problem appears in many cases to be
  high tax rates.‖
So Where’s the Harmful Part?
   The OECD, European Commission, UN, and
   allies are motivated by greed for more tax
   revenue – meaning more power, which is
   why they want an OPEC for politicians.
   This is unseemly, so they claim their real
   interest is stopping ―harmful‖ tax competition
   – but have never offered any evidence.
   Empirical and theoretical data supports tax
   competition.
Conclusion
Tax competition should be celebrated rather than
persecuted.
In the real world, truth takes a back seat and
―might makes right.‖
The Cayman Islands and other international
financial centres need to be aggressive as
possible given their constraints.
Make the moral case, citing rampant corruption
and human rights abuses around the world.

								
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