Tax havens: is it ethical to outlaw them

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We no longer need to say, as we once did, that tax havens (or secrecy jurisdictions as we prefer to call them) are a problem: we have proven that to be true. Day by day more and more people are convinced that action needs to be taken against tax havens. Gordon Brown has now been added to the list of Barack Obama, Angela Merkel and Nicholas Sarkozy.

But almost hourly people call me and ask “what can be done?” It is a reasonable question: some tax havens like Switzerland and Luxembourg are sovereign states. All have the right to pass legislation. It is that right that lets them deliberately undermine the regulation (whether with regard to tax, financial regulation, inheritance, trade or more besides) of other states, which is the sole characteristic that they all share in common. What this question boils down to is ethical speculation on our right to apparently interfere with the sovereignty of another jurisdiction.

So let me deal straight away with the ethics of tackling tax havens. This is important: the tax havens won on this issue the last time they were attacked, principally by the OECD from 1998 onwards. This happened because of the way in which the OECD defined the problem. They said a tax haven was a place with:

a) No or only nominal taxes

b) Lack of effective exchange of information

c) Lack of transparency

d) No substantial activities

In a sense they were right, except this described the symptoms of the problem, not the problem itself. As such the focus was on changing the behaviour of the haven itself, not on mitigating its effect in the states demanding change. This was bound to fail, and fail it has because in the intervening ten years we have learned that the havens have no intention of changing their behaviour, and we have only limited power to make them do so (except in the case of the incredibly important UK dependencies – where direct action is possible). In that case this was the wrong definition producing the wrong policy outcomes, however laudable the OECD’s objectives.

If instead of focussing on the tax issue (which is important, but not key) and instead we focus on the secrecy issue (which is the core problem, whether it be tax, financial or other regulation that is being abused) then we must define a secrecy jurisdiction and not a tax haven.

I define a secrecy jurisdiction as a place that intentionally creates regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction and which, in addition, creates a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

This then makes it  clear that the actions of the secrecy jurisdiction provide us with the ethical answer that we need to justify action against them. They have chosen to attack the sovereignty of other places to promote their own economic well-being. Those responding to that attack with economic sanctions are doing so as an act of self defence to preserve their sovereignty. They are not attacking the sovereignty of another place. As such sanctions can be ethically justified.

This is the basis on which the attack on tax havens / secrecy jurisdictions must be built. We can win from this launch platform.

I’ll deal with the appropriate sanctions later.