The debate on tax havens is hotting up. Which is good news.

The Observer, I think correctly, notes that:

Gordon Brown is preparing to unveil a blacklist of harmful tax havens to be published before the crucial London G20 meeting next month. The list is expected to include offshore centres linked to Britain, including the Cayman Islands and Bermuda.

The Observer editorial also sets this firmly in the appropriate context:

About £8.2 trillion of private wealth currently sits in havens, undeclared by its owners in their country of residence. That represents £180bn in lost tax - more than double the world's global aid budget. Tax avoidance costs the UK treasury £25bn a year.

I readily admit: I think all the data referred to was calculated by me, but that is not the point. The Guardian recognises the cost to the world and the UK of this issue at a time when just about every additional pound, euro, dollar and yen is going to be needed to tackle the global economic recession. It is wholly unacceptable in that case for anyone, most of all those who command the greatest wealth in the world to avoid their obligation to share that burden.

It is good to see the Sunday Times share in that approach. It notes:

In better times, governments around the world were supportive of the booming capital markets, which were fuelled with capital that flowed through funds registered in offshore tax havens.

Now that taxpayers around the world own large stakes in banks, an awkward tension has emerged. As revealed by The Sunday Times last week, Royal Bank of Scotland owns 238 offshore companies, including 66 in the Cayman Islands and 30 in Jersey. It even prints the banknotes for the Isle of Man. Lloyds Banking Group, which is in talks with the government over the taxpayer taking a greater stake, owns 125 offshore companies.

Again, almost all the data the Sunday Times uses was researched by me, this time for the TUC, and in typical Sunday Times fashion, no credit is given for that, and I am quoted out of context. But this is not the point: what they show is that they understand by reporting the issue in this way is that the concern does not just relate to tax, it is primarily one about regulation.

The Observer does very clearly accept this argument. It argues that:

Cracking down on havens would serve a purpose more profound than raising cash for an indebted government. It presents an opportunity to recast the debate around taxation in moral terms. An axiom of the now discredited economic orthodoxy of recent years was that any taxation on business was undesirable, since it discouraged enterprise. By extension, the less companies (and individuals) had to pay, the more competitive they would be, bringing economic advantages - employment, cheap goods etc - to all. That view is contained even in the term "tax haven", with its connotations of sanctuary.

A better expression is "secrecy jurisdictions", where, along with the profits of legal activity, the spoils of fraud, terrorism, drug trafficking and plunder by despotic regimes are hidden. That is the company that global businesses keep when they operate offshore.

It is true that excessive taxation harms business. It is also right that governments should be allowed to attract companies by offering competitive tax rates. But there is a difference between creating a tax regime that is good for open commerce and setting one up to be deliberately opaque. Regimes that do the latter should be ostracised by international treaty. It should be a goal of G20 leaders meeting in April to begin negotiating a universal convention on transparency in accounting for profits - and paying tax on them - in the jurisdiction where they are earned. National governments could then ban businesses from operating in countries that were not signatory to such a convention. Multinational companies could then choose whether they want to behave like responsible citizens in a global economy or like organised crime.

I could have sought to make similar argument: they make it for me. And as the proponent of recasting tax havens as secrecy jurisdictions I can hardly argue with their promotion of the term.

At the risk of repeating a definition I have referred to time and again of late I repeat that:

Secrecy jurisdictions are places that intentionally create 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 that, in addition, create 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 definition is, as I have noted before, critical when addressing this issue. Unless the appropriate language is used those who continue to defend tax havens (as they would not like to call them) have arguments they can promote.

It is interesting to note that the Financial Times is (perhaps inevitably) becoming a centre for tax haven defence. Jersey is, of course, also offering its own defence for its actions, and is announcing its intention to be robust in this area over the next few weeks.

These issues need to be addressed. As Geoff Cook of Jersey Finance says in his new blog:

Well before I explain let’s lose the pejorative label [tax haven]. No one can define it meaningfully and like many nasty nick names it is designed to conjure up negative images of wrongdoing and dodgy activity, and neatly sidesteps any sense of obligation to conduct an objective examination of the facts.

The criticism is aimed at niche International Finance Centres (IFCs) and is usually fed to the media and politicians by anti business groups, opposed to tax competition and free markets in mobile international capital. Ironically these critics are inclined to attack globalisation, multinationals of all types, and are the authors of the protectionist clamour that the G20 has vowed to avoid.

I have little doubt that Geoff Cook is aiming his comments at the Tax Justice Network in particular. John Christensen, International Director of TJN and I are the b?â„¢te noire of Jersey. But he is entirely miscasting the arguments we present.

Firstly, we’re more than happy to leave the term tax haven behind. I have been arguing that this is essential, as noted above. Of course we won’t replace it with the term International Finance Centre: no one can define what that means either, least of all Geoff Cook, who you will note does not seek to do so.

Secondly, to suggest that TJN or I are seeking “to attack globalisation, multinationals of all types, and are the authors of the protectionist clamour that the G20 has vowed to avoid” is absurdly wrong. I am committed to trade. I believe that business is a primary generator of wealth. I happen to think that has to be in partnership in government — and evidence of anything to the contrary is hard to come by, but to say I oppose multinationals or promote protectionism is absurd.

The reality is exactly the opposite. It is precisely because I do believe in trade that I have argued there are strong economic reasons for supporting accounting reform to ensure that the information needed to make trade efficient is available.

Now I’ll use a similar argument to oppose Geoff Cook and those who inspire him — Martin Wolf and Avinash Persaud of the Financial Times.

Cook quotes Martin Wolf saying:

First we must set priorities. I note with consternation Europeans’ obsession with regulating hedge funds and tax havens. Did they cause the crisis? No. Europeans also call for regulation of all markets, products and participants without exception. This is like calling for research into Radar whilst the Titanic sinks. Do they realise that the systemically significant banks at the heart of this crisis are the most regulated institutions we possess. Let us not be diverted from today’s priorities

Persaud says much the same thing:

Political leaders in the US, Germany, France, the UK and elsewhere have once more threatened to close down offshore financial centres. These centres have been presented as the drug dealers of modern finance and pushers of instability. Yet the origins of this crisis are in a failure of regulatory philosophy in the US, Europe and elsewhere. It would have occurred were there no offshore financial centres. The attack on offshore centres is a politically seductive distraction from the thorny task of making regulation better in large developed countries and will end up being a discriminatory attack on small developing countries with little voice.

I readily confess to astonishment that people like Wolf and Persaud can peddle comments of this sort. Even worse is this one from Persaud:

Of the 192 members of the United Nations, 56 countries and a further 100 dependent territories have populations of less than 1.5m. Smallness brings its own challenges and vulnerabilities. International finance is one of their few comparative advantages: it can be scaled up without more land and labour. Many have developed genuine world-class expertise in international financial services — such as Bermuda, Luxembourg and Guernsey.

The current financial crisis suggests that large states have a comparative disadvantage in global finance. They do not need global finance to prosper but global finance distorts their economy and politics. There are more than a few small states that need to improve the quality of their regulation but so, too, do large states. European and US governments should refocus regulation on all financial activities that take place in their jurisdiction, making them less vulnerable to the quality of regulation in Iceland or elsewhere. They should also agree broad principles internationally and sign common information agreements across all the jurisdictions their banks deal with.

This is wrong, as wrong as Wolf is wrong.

So too is Vanessa Houlder wrong in the FT today when she says:

There is scant evidence, however, that the offshore centres are to blame for financial turmoil. The UK Financial Services Authority told MPs last year that offshore centres had already undergone extensive regulatory reviews. It said: “These reviews have tended to conclude that offshore financial centres per se do not pose a threat to global financial stability and that standards of regulation are generally comparable to those that apply in other jurisdictions.”

I’d begin to think there was an FT conspiracy here (actually, I do think there is an FT conspiracy here) except she adds:

But there is a widespread acceptance that better regulation is needed, in which offshore centres cannot be allowed to be weak links.

Precisely.

Of course it is true that the current world financial crisis is an on-shore crisis. The fact is that nothing of any consequence happens in secrecy jurisdictions. No issue of this scale could have arisen in them alone as a result.

This though ignores the entire reason for their existence. There are two of those. The first is regulatory abuse. The lax regulation onshore happened because at any time the banks and other financial institutions could (and did, often) argue that if they did not get the lax regulation they wanted then they would leave for offshore. They still are. Let’s be clear, in this area secrecy jurisdictions did exactly what their proponents argue they are best at: reducing government interference. We have all paid the price for that. And those of us who argue that offshore regulation is the first step to the essential re-regulation of onshore do so because we know, and rightly know, that on-shore re-regulation will not be happen, and is not even possible unless there is strong offshore regulation, or no offshore at all. IF Wolf and Persaud do not appreciate that they either fall off their pedestals or one wonders what their motive might be. The FT certainly profits heavily from the offshore sector. Perhaps that’s why in today’s FT editorial it says:

If spats over minutiae — such as the regulation of tax havens or bankers’ pay — were to stand in the way of a [G20] deal, the verdict of history would be damning.

Let’s be blunt: this is the FT pandering to its advertising base, nothing more or less, and should be dismissed as such.

Second, if Persaud, let alone the FT, really thinks his argument holds water he is not much of an economist. He also knows remarkably little about offshore banking in particular. Unless of course, he knows rather a lot and is trying to preserve that option, because let’s face the reality of what offshore banking is. It is not an activity undertaken by banks unknown onshore. There are almost no banks offshore unknown onshore. Any that are in that category are almost wholly irrelevant in the offshore finance game. For all significant purposes onshore and offshore banks are the same thing. Look at the research I did for the TUC on UK banks with offshore branches. The biggest banks in the Channel Islands are all from the UK, Germany, France, the USA, Spain and so on. None are local.

It is impossible therefore to say as Persaud does that places like Bermuda and Guernsey have a comparative advantage in international finance when compared to large states. They have no such advantage at all. They merely have resources transferred to their locale by international banks — for the vast majority of the so called ‘offshore finance centres’ are staffed, at least in their upper echelons and in all key management roles by persons not native to, and on temporary secondment to, the places in question.

Those persons could just as easily be employed elsewhere. So why are they in Cayman, Jersey, or wherever? Precisely because of the regulatory abuses that those places allow: low regulation (whether tax or financial services regulation) and secrecy from discovery of what is going on. These two factors in combination do, I fully admit, create a comparative advantage. But this is one that is wholly artificial based solely on their ability to produce abusive legislation and is one that is entirely harmful to the smooth operation of markets.

This is easy to explain. Efficient markets are dependent upon the availability of information: the better the quality of the information and the more open the access to that information is then the better will be the efficiency of the allocation of resources by the market. Tax haven activity is entirely dependent upon secrecy. That secrecy is an entirely deliberate and artificial market distortion. It is only available to some businesses and people and not others: a premium is placed upon access to this ability to hide one’s affairs.

One premium is imposed by cost: it is not cheap to set up offshore structures. As a result they are only available to larger businesses and wealthier individuals. As a result the wealth gap increases.

Another premium is imposed by age: those able to create structures before they are declared illegal are usually allowed to retain them after use by new market entrants is banned. This means older people, and most especially older companies have opportunities not available to new businesses that cannot legally access these centres. This has created a bias against new enterprise.

Thirdly, there is a premium imposed by legality. Some will choose to act illegally and take the risk of doing so. Others will not. If insufficient resource is allocated to tackling the illegality there will be a positive, and predictable return from that illegal behaviour which imposes a premium on those who choose to be law abiding.

Lastly there is a premium on those who work nationally: they cannot access offshore in a way those who work internationally can. They suffer as a result.

But in each and every case the answer is not to open the market to all: for a start that is not possible. The answer is instead to make a level playing field. That means all should place their data on public record; all should have their data exchanged with their domestic tax authorities; all should provide it to those who need to appraise the risk of trading with them if they are a limited liability entity.

Then we remove a market distortion. That market distortion does at present support monopoly power, support the power of those already wealthy, support the power of the large company over the small company, the power of the existing market player over the new market entrant. These all result in the misallocation of economic resources: most especially they result in rewards being paid to those who already have wealth.

There is no benefit from this for society as a whole. Far from it. Wealth and resources are misallocated. Because of the secrecy implicit in offshore the cost of capital goes up (one reason why the bank bail out has been so expensive). Because of the activities of offshore agents a cost of tackling abuse is imposed on society at large.

None of these need happen. Those who argue against tackling offshore argue for inefficient markets. Those, like me, who argue for tackling it argue for efficient markets.

Jersey, the FT and FT columnists all seem to like inefficient markets. I don’t. I want an efficient global trading system where resources are as optimally allocated as possible, where risk is mitigated and capital has the lowest possible cost.  Getting rid of tax havens would help achieve that.

That’s proper globalisation for all, not globalisation to reinforce monopoly profit which is what we have now. I defy anyone to prove me wrong using economic theory.