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10 | Investment International blog
As wealth creation and distribution became An unlikely alliance of tax hobbyists, left manner. Moral judgement without a transcend-
more dispersed, voter emancipation accelerated wing newspapers, trades unions, and develop- ing benchmark is simply a matter of opinion,
the process with welfare programmes, health, ment agencies has catalysed around calls for and opinion fuelled by anger is rarely rational.
education and pensions all increasingly seen as greater concentration of the means of wealth Paid for ‘research’, produced by the tax hob-
the right of every citizen. All this has been creation in the hands of governments, and byists, supported by self interested union
achieved through the redistribution of wealth implicitly greater taxation of business and groups, and trumpeted by sympathetic bugles,
progressively from those who create or hold it, wealthy individuals through the outlawing of claims that billions is being misappropriated
to those who don’t, principally through the wealth structuring and planning, together with through international finance centres. These
means of taxation and government benefits. restrictions on cross border capital flows. claims have no credible evidence underpinning
When in balance this system has worked well, They hope that their own constituencies will them, demonstrating an opacity which these
but there are inherent dangers. If through the be beneficiaries of this new ‘contract’, with the same sources would find intolerable were it pos-
populism of voter appeal or through some sys- authors; the tax hobbyists, gaining fame and tulated by others. This pure ‘guess work’ is sim-
tematic ideology the means of wealth creation funding, and their supporters feeling validated ply a convenient fiction designed to mislead and
are overburdened, the incentive to create wealth in their enduring distrust of the wealthy and incite opposition.
is diminished, and governments consume a their advisers. The UK budget contains fresh measures
greater and greater proportion of the total eco- Moves are in train to stigmatise wealth struc- designed to make the well off pay more, and Mr
nomic value available. turing and planning; to restrict capital move- Brown’s recent letter to the Crown
Eventually the economic engine becomes too ment through attacks on the use of Dependencies in respect of ‘tax avoidance’
dependent on an inverted pyramid of wealth international finance centres, and to undermine implies further measures may follow.
creators. The creators become disincentivised transfer pricing arrangements. If successful the Herein lies the fundamental lack of under-
and go elsewhere, or simply down tools. This combined effects of these protectionist meas- standing of the benefit the Crown
was the situation in the United Kingdom in the ures will be to trap capital within borders, sig- Dependencies bring to the United Kingdom.
1960’s and 70’s with the basic rate of tax peak- nificantly reducing overall economic activity. With around £200bn of international capital
ing at 35%, and a top personal income tax rate Such measures will restrict wealth creating conduited into the City of London by Jersey
of 98%. With the recent budget announcements activity and encourage growth in central gov- alone, it is self evident that significant benefit is
it seems the UK is once more travelling in this ernment expenditure. The net effect will be a being enjoyed by the UK from this activity, not
direction. constriction of wealth, a reduction in tax bases to speak of the substantial liquidity support to
Most developed democracies would see the and a loss of global prosperity, driven by a short the UK banking system throughout the banking
maintenance of a balanced system of wealth dis- sighted grab for tax, all delivered through the crisis. Indeed if the deposit value supplied by
tribution as fair and reasonable; with those who Trojan horse of transparency. the three Crown Dependencies is aggregated,
prosper enjoying the fruits of their wealth, Even the OECD believes this kind of protec- the level of liquidity support is significantly
whilst providing for shared services and a safety tionism in respect of tax competition would be greater than that supplied by the Bank of
net for the needy. a bad thing:- “We also agree on the need to England.
As with any spectrum of opinion there are avoid raising new tax obstacles to cross border Contrary to the myths propagated by detrac-
fundamentalists who operate at the margins, trade and investment. Indeed, it has been assert- tors, Jersey’s deposits are gathered from over
fiercely intolerant of those who will not accept ed that, if the project can be successfully con- two hundred countries across the globe, and
their views. Most of the time this doesn’t mat- cluded, governments will be subject to with the majority held in non sterling curren-
ter, as the majority view holds the centre legitimate market constraints and that fair tax cies, it is undeniable that substantial additional
ground and balance is delivered through the competition may produce a strong downward financial value is brought to the United
ballot box. But at times of crisis and uncertainty pressure on tax rates.” Kingdom by its loyal Crown Dependency.
this can change. The reality is this particular grab will miss In Greek mythology, the Sirens were three
Free markets; globalisation and tax competi- the target, as even if discriminatory measures enchanting seductresses, who lived on an island
tion have all combined to produce stellar are introduced, they will not see universal adop- called Sirenum scopuli. Sailors who sailed near
growth in world GDP over the last thirty years tion. Like water, the flow will follow the course were compelled by the Sirens' enchanting
pulling countless millions out of poverty. Sadly, of least resistance, with mobile capital moving music and voices to shipwreck on the rocky
problems caused by the tooth and claw capital- eastwards as the USA and Europe live with the coast.
ism of a few ‘financial masters of the universe’ outcomes of the unintended consequences of The Siren voices of the tax fundamentalists
over the last few years may be about to undo financial services protectionism. may appear compelling; but beware Mr. Brown;
much of this good work, that is, if the tax fun- In times of crisis strange things can happen, there is no pot of gold at the end of this rain-
damentalists have their way. extremists can sound rational and appealing as bow, only a further weakening of your already
Unfettered capitalism can be problematical, all norms are brought into question, and weary embattled banking sector, as capital takes flight
and checks and balances by way of sound regu- travellers look for a new compass to navigate to friendlier shores.
lation are clearly essential. However it is impor- their way through stormy seas. Should you require evidence to support this
tant to keep in view that in remedying the Utilising your tax free savings allowances, claim then you need look no further than the
global financial crisis, it is the checks and bal- paying into a pension or trading a few shares Eurobond market for the clearest demonstra-
ances which need attention, and that we do not within your capital gains tax allowance, are tion of the law of unintended consequences. A
throw the wealth creating baby out with the activities that many millions of people under- $3 trillion dollar market which left New York
bathwater. take in the UK. They are tax avoidance; which for London in 1963, due to the more attractive
The huge volume of commentary which has means to say that without taking those planning conditions provided by the United Kingdom. A
followed the crisis; with every pundit, commen- measures, those people would pay more tax. market where no meaningful records are kept,
tator, special interest group, and anti business To accuse banks or companies or individuals bearer status is still permitted and no tax is
lobby, now championing their superior ‘model’ of illicit, or immoral behaviour because they paid.
for the conduct of wealth creation, distribution plan their international affairs in perfectly legal Prime Minister, this market sounds like a
and taxation, has certainly generated more heat and sensible ways simply raises the spectre of much more attractive target for the tax funda-
than light. wrongdoing in a misleading and mischievous mentalists; that is, unless you wish to keep it.
May 2009 Investment International www.investmentinternational.com
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