The ethics of offshore May 2005

Is the whole concept of offshore a wicked and immoral thing? James Featherstone ponders.

Tax havens. Nasty places. Dodgy individuals illegally escaping tax by salting their money away in no-questions-asked bank accounts. Crooks laundering money, terrorists funnelling funds, greedy fat rentiers enjoying civilisation’s benefits without paying for them, multi-national corporations avoiding all tax and regulation: these are the unsavoury individuals you’ll find shifting along the esplanade in Jersey, or the Bahamas, or Gibraltar or…there are lots of places now.

That, give or take a lurid detail, is the image of offshore centres in the minds of many people. The syllogism seems to go: it is right to pay your full share of tax, offshore centres enable people to avoid doing so, therefore they are immoral. Writers like The Guardian’s George Monbiot believe that the whole offshore world is so iniquitous it should be outlawed. Last year he wrote an article going further, arguing that everyone’s tax return should be publicly available for inspection.

There are two issues here. One is the question of whether it is legitimate for individuals to minimise the amount of tax they pay. The second is whether low- or no-tax jurisdictions are morally acceptable full stop, given the distortions their critics say they cause in the wider financial world.

As to the first question, let’s hear from early twentieth century American jurist Justice Learned Hand: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” There is a difference, in other words, between tax minimisation and tax evasion. In as far as offshore jurisdictions make the former easier – particularly for expatriates – they are, or ought to be, unexceptionable.

Unfortunately, that isn’t the case today. Last year mutterings were heard from European MPs that even legitimate tax avoidance schemes ought to be outlawed. The very effort to minimise the tax a person pays is increasingly seen in some quarters as an immoral act. For political reasons, tax virtue has been defined in as maximalist a way as possible.

That brings us on to the second point: is tax competition a bad thing in itself? Is there still a legitimate political discussion about how big government should be, what level personal and corporate taxation should be set at, and should different jurisdictions continue to embody those divergent ideas? The answer is surely yes. Political differences over the role of the state in the operation of markets and in the way individuals behave within them are unresolved. That’s why we have elections and not anointings. Jurisdictions taking different slices in tax and maintaining different sizes and styles of government are in effect the physical instantiation of unresolved issues in political philosophy.

Yet the belief that offshore centres are necessarily wicked because they hamper the ability of onshore countries to charge whatever they like in tax is based on the presumption that that deeply political argument about the nature of government and taxation have been – de facto if not de jure – settled. Listen to, say, EU MPs talk about offshore centres and the strong impression gleaned is that low-tax jurisdictions are wrong and immoral because “all right-thinking people” believe the politics have been decided; and decided in favour of high tax and spend government. There is even a volley of complaint currently being directed against the new Eastern European members of the EU because they charge lower corporation tax rates than European giants like Germany or France. This seems arrogant. But one could argue that the legitimacy of a system of government is based on the ability of people to choose to live under another system. Unless we get total political agreement some day, tax competition is right and necessary.

To be sure, institutions like the OECD and many of the EU member states pay at least lip service to the idea that tax competition is a legitimate feature of the modern world. But, going by the Biblical principle of ‘by their actions shall ye know them’ they probably secretly believe something different.

None of this is to assert that nothing is wrong with the offshore world. Some of the accusations – even some of the more fluorescent ones – are true. News Corporation has paid precisely zero British corporation tax over the last five years. Enron avoided paying US federal taxes in four out of the five years prior to its collapse, despite reporting huge profits. Dodgy Russian millionaires really do fly into Gibraltar, the Caymans and Bermuda with suitcases full of cash. (Well, they used to: money laundering regulations in all those places make that particular method unviable now, but there are other places they can slither into; the Chelsea boardroom, for instance.) Some individuals who owe tax to their home country really do use offshore financial centres to avoid paying it.

However, the question is whether the concept of offshore per se is a morally acceptable one, not whether individuals and companies take advantage of this or that aspect of it. Plenty of people take advantage of the City of London, Frankfurt, Wall Street and (for all we know) Pyongyang.

My conclusion is this. Some degree of tax competition is a good thing. Until we all agree on what type and size of government we want to live under, it is wrong for one side to try and resolve the question by fiat (or, in this case, by outlawing places that embody the opposite political/economic idea, such as offshore jurisdictions). Tax competition keeps otherwise over-mighty onshore governments honest.

Equally, it is perfectly legitimate for individuals to try and minimise their tax bills using legal methods. If you argue otherwise you might as well say that it is immoral to try and buy bananas at the lowest available price – both involve prices paid for goods and (governmental) services received. Who is likely to be able to convince you that you should pay as much as you possibly can?

The question of how current offshore centres are run is a different argument entirely. By all means crack down on illegal tax evasion and money laundering. Alter rules surrounding accountancy practices like transfer pricing (a way multinationals have of jiggling the books so as to artificially lower their tax bills). But don’t argue for a homogenous world-wide tax regime. Don’t close down offshore centres in pursuance of a utopia. That would be like winning and argument by the judicious application of a baseball bat.