February 20, 2008
Blockade the tax havens
Around 1000 rather affluent Germans are not sleeping too well since former Deutsche Post AG Chief Executive Officer Klaus Zumwinkel was arrested by the German tax authorities on February 14. The information leading to his arrest came from a DVD containing a list of alleged German tax evaders, purchased for around € 5 million by the German BND intelligence service to pay a former employee of LGT, Liechtenstein’s biggest bank. It was money well spent.
Tax havens are to those engaged in tax evasion what fences are to thieves. Tax evasion is a crime. It’s not harmless cleverness and fun; it’s theft from the community you live in. Those who engage in it, and those who facilitate it, are criminals. It is time that the more determined, if not yet sufficiently aggressive, attitude and actions of the civilised world towards money laundering is extended to tax evasion through off-shore tax havens and the corrupt states/entities that live off this trade.
The list of countries that make a living out of tax evasion and related activities (essentially the same countries that consciously created, and in some cases continue to offer, facilities, laws, regulations and institutions to facilitate money laundering) is long. The OECD lists 35 microstates with the tax haven designation, but this excludes larger countries with strong bank secrecy laws whom the shoe fits just as well (e.g. Austria, Switzerland, Luxembourg).
Many are located right in Europe. The include micro-states/entities like Monaco, Liechtenstein, Andorra (the only three tagged as “uncooperative” tax havens by the OECD), Guernsey, Jersey and the Isle of Man. Any country with an unhealthy respect for bank secrecy is part of the tax evasion/money laundry fraternity. Among the EU members, Luxembourg and Austria are prominent examples. Cyprus has long been a surprisingly copious source of funds invested in the former Soviet Union. Outside the EU but in the heart of Europe, Switzerland has long profited from the facilitation of foreign tax evasion and money laundering.
Of course there are many other tax havens, money laundromats and regulatory havens outside Europe. The Caribbean has quite a few (the British Virgin Islands, the Cayman Islands, Panama etc.), and others are scattered all over the world. The European tax havens are, however, unique in offering stable governments, predictable laws, rules and regulations - indeed most of the letter but none of the spirit of the rule of law - and low risk of having part or all of the ill-gotten gains parked there expropriated or extorted. The European tax havens are a tax evaders paradise. It is time to change that.
The vast majority of European countries - all those that lose out because of the existence of these tax havens - should unite in a determined effort to end these countries’ ability to offer safety to tax evaders by granting anonymity, confidentiality and secrecy. The exact modalities may differ from case to case. Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board. The special status of these strange entities is not cute; it’s an enabler and facilitator of unethical and illegal behaviour. The EU should adopt a directive on bank secrecy that would end the nefarious practices of Luxembourg and Austria. Belgian dentists will just have to get used to paying taxes. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively).
Switzerland is the big prize, as unlike the other tax havens, it is a country rather than a dwarf-state and postage-stamp curiosity, and it is outside the EU. It should be subject to sufficiently stringent economic sanctions from its neighbours (after all, it is landlocked!) to induce it to abandon the laws, rules and regulations, including its extreme version of bank secrecy, that make it the one of the countries of choice for parking illegal or extra-legal money.
The activities engaged in routinely and as a matter of course by these tax havens are hostile acts towards all countries whose tax bases are undermined by them. It is time to stop being polite about it. If the EU, the US, Canada and Japan were to take a united line on this, things could change very quickly.
Don’t we seem to have forgoten about democracy here? Why shouldn’t sovereign states be able to have the tax regime they want? Merkel’s disgraceful threatening of Liechtenstein should be exposed for what it is.
If Germany had a lower tax economy it would have less evasion
Posted by: Tim Hedges | February 21st, 2008 at 6:45 am | Report this commentThe only rights that matter are human rights - the rights of natural persons. Any other so-called “rights”, including those of groups (minorities, majorities, legal personalities, countries) should yield before human rights. Their is no human right to assist thieves and benefit from their activities with impunity.
When parasitic entities aid and abet crime, they should be punished, even if they (laughably) are called ’sovereign states’.
Written from the sovereign state of 24 Micheldever Road, London (just declared independent, democratically, by all its residents).
Posted by: Willem Buiter | February 21st, 2008 at 8:26 am | Report this commentEconomic measures, within international law, should certainly be taken to eliminate practices by that facilitate tax evasion. However, suggesting forced annexation of small states by their larger neighbours is quite alarming. I had thought this sort of thing went out of fashion in western Europe by the 1950s, and throughout the continent by the 1990s.
Posted by: Thomas S. | February 21st, 2008 at 9:37 am | Report this commentThe Channel Islands, Monaco, Andorra and Lichtenstein are trumped-up countries, small municipalities that have fallen through the cracks of the international rule of law. Such entities ought to have no rights. De minimis non curat lex.
Posted by: Willem Buiter | February 21st, 2008 at 11:12 am | Report this commentThe ends justify the means. This principle is often used to, momentarily, put ethics aside. With looming pension finance shortfalls, and unaffordable welfare state policies, politicians will increasingly be tempted to confiscate, rather than tax. Better unfair than unpopular. Tax heavens are there to remind them that too many taxes will kill the taxes. If countries like France levy annual taxes on capital of 1% (regardless of interest) today, why would it not be 5% tomorrow?
Posted by: Roland S | February 21st, 2008 at 11:17 am | Report this commentProf. Buiter policies would simply mean an exodus of the rich, rather than just the exodus of their money.
Tax havens like the Channel Islands, Monaco, Andorra and Liechtenstein are trumped-up countries, overblown municipalities that have fallen through the cracks of the international rule of law. They aren’t states that have rights - if only because de minimis non curat lex. The individuals that live in them have the same fundamental human rights as everybody else.
Posted by: Willem Buiter | February 21st, 2008 at 11:18 am | Report this commentTax evasion isn’t the crime.
Taxation is the real crime. Hard-working people who see their earnings taken by overpaid politicians and wasted on endless pork-barrel political projects, some even given to apologists for the ancien regime like Dr(?) Buiter.
It just so happens that politics is on the side of the thieves—for now. Not for long, eh?
Getting a little hot, eh, Dr. Buiter? What happens when globalization drives your little Napoleon friends out of office? Have to turn in your company Mercedes? Ohhhh…. poor Dr. Buiter!!!
From the history books:
Question: Qu’est-ce qu’il faut faire pour vous aider?
Reponse: Nous laisser faire!
Posted by: Mike Smith | February 21st, 2008 at 11:21 am | Report this commentI just re-read your article and I just want to
add…
I can understand that you call for Anschluss
for Liechtenstein. Not to their historical friends
the Swiss, but the Austrians, of course.
But blockade the Swiss? Are you f****** nuts? Not even the last Fuhrer tried to do THAT!!!!
Posted by: Mike Smith | February 21st, 2008 at 11:26 am | Report this commentArticles like this are one of the main reasons why (not only) wealthy individuals are becoming more and more suspicious of the big brother states and its representatives. Tax evasion primarily happens through transfer of already income/profit taxed taxed money because interest/dividend/and capital gains taxes are regarded as unfair in general or too high by the individuals concerned. Countries with competitive CGT regimes do not have that problem and therein lies the real challenge for large countries like the UK and Germany and both seem to worsen their competitiveness through recent legislation. How does the Professor view the perfectly legal tax reduction through nondom legislation, even after the changes to it? Isn’t he one of those responsible in the MPC for the UK’s sale of its gold reserves at 250$? Please don’t confuse him of having german roots, if anything they’d be dutch which would make his geographic and totalitarian arguing even less understable though.
Posted by: Jay Beringer | February 21st, 2008 at 11:53 am | Report this commentI guess the fact that the UK is (and still will be even under the proposed new non dom rules) the worlds largets tax haven for non UK citizens by far (both in untaxed earnings and personage). So lets ensure when we discuss sanctions against soveriegn states we include Britain.
You would never have guessed this guy had advised our limp government on its non dom legislation. Wont be long now before 1976 happens all over again. Keep up the good work!!
Posted by: Mr T, Director, Off shore | February 21st, 2008 at 12:10 pm | Report this commentJay: I don’t think Germans care to have totalitarian leanings be “understandable”, but yes it is rather confusing that a Dutch person would be insensitive to the historical allusions of another Austrian Anschluss (albeit in the opposite direction).
Dr. Buiter, the title of your article is “Blockade the tax havens”. You are aware that a blockade is considered an Act of War under the Law of Nations?
Your writings are incredibly irresponsible. I wonder if you think before you type…
Posted by: Mike Smith | February 21st, 2008 at 12:13 pm | Report this commentBy the way (my final post, I promise), it should be remembered that the target in bullying Liechtenstein isn’t Liechtenstein at all but (as I am sure Dr. Buiter knows) Switzerland.
Switzerland and Liechtenstein are in an age-old customs union (Zollunion) and Liechtenstein’s non-accession to Schengen means either dissolution of the customs union or that Switzerland doesn’t get to join Schengen.
Dirty politics at the highest level. So much for “freies Europa” as they called it when I visited Germany just after reunification…
Posted by: Mike Smith | February 21st, 2008 at 12:18 pm | Report this comment“Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board.”
“Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively).”
Astonishing, Prof. Buiter, truly astonishing. I used to respect your views, but these are profoundly illiberal and irresponsible statements. Why do you think it is acceptable for large states to bully small ones?
Posted by: Stephen Richards | February 21st, 2008 at 2:00 pm | Report this commentMost of the 35 tax havens listed by the OECD, including Liechtenstein, Monaco, Andorra and the Channel Islands are trumped-up states; they are small municipalities pretending to be countries, that have somehow, through some accident of history, fallen through the cracks of the international rule of law. Their very existence as pretend-sovereign states is an affront to international natural justice.
These entities, or tax havens, have no legitimacy or rights. They are crime-fostering enclaves that should be deprived of their capacity to do harm. Their citizens/inhabitants do of course possess the universal human rights shared by all individuals.
Posted by: Willem Buiter | February 21st, 2008 at 2:20 pm | Report this commentGood on you, Willem! For once someone telling the truth, that the people who use tax havens are criminal freeloaders. Their businesses take advantage of all the public spending - education, health, defence, infrastucture etc. and yet they personally contribute next to nothing compared to their enormous incomes. I’m all for lower taxes, but EVERYONE should have to pay them without exception. However, persuasion applied needs to be somewhat more low-key than blockades! I’m sure there are plenty of pressure points, though…
Posted by: Robert C | February 21st, 2008 at 3:01 pm | Report this comment“they are small municipalities pretending to be countries”
How do you distinguish between the two? Population size? Jersey has a population of around 91,000, whereas Luxembourg has a population of 480,000. The latter is barely more than my own fair City of Edinburgh (448,000), so where do you draw your line? And why should you (or me for that matter) have the right do decide if the inhabitants of a territory can call themselves a country or not?
“Their citizens/inhabitants do of course possess the universal human rights shared by all individuals.”
Posted by: Stephen Richards | February 21st, 2008 at 3:19 pm | Report this commentExcept, according to your argument, the right of self-determination!
What a ridiculous article.
The writer portrays a situation where if you dont agree with another sovereign country’s rules and regulations then you just bully them into submission.
Its schoolyard tactics of the lowest order and gives remarkable insight into the inner workings of a so-called financial guru.
Why dont we just reverse 50 years and have it out in the street?
Annex a sovereign country. Lordy Lord, that’s only happened a handful of times in the last 100 years, every time causing a war involving a multitude of countries and much loss of life. It really is irrelevant the reason for the conflict.
And for what, a few lousy tax dollars?
Maybe if the UK government didn’t make so many public gaffes and try to tax everything from flying (in the name of the environment) to toast and marmalade this wouldn’t be a problem.
The big problem here is not the existence of tax havens, its the propensity and ability of UK and German residents to use them.
But instead of attacking the root cause of all this by closing the loophole these so-called economic giants would rather just crush a smaller country. At least per Buiter and Merkel.
Surely it would be much less dramatic to close the local loopholes or does Buiter and MErkel not want to play the bad guy?
Posted by: Jonathan | February 21st, 2008 at 4:42 pm | Report this commentThe US did it easily enough…
Since the Isle of Man has had a government and laws more than twice as long as the Netherlands - the Tynwald dates back to the eighth century whereas the Netherlands can, at best, claim to have achieved statehood in the sixteenth century, Willem Buiter’s latter comments look like those of a spoilt child.
Posted by: John | February 21st, 2008 at 6:35 pm | Report this commentThe banks in Liechtenstein obey the laws of Liechtenstein instead of following the tax code of one of the German lander? Oh how terrible!!
Can we expect Mr Buiter to write an article justifying US “special rendition” of innocent suspects - Mr Milliband says that one of the two in a plane refuelled at Diego Garcia has been released, presumably because he was innocent, the other has been detained but not tried, presumably because they don’t know whether he is innocent or guilty - and Chinese arrests of anyone who criticises their government wherever they are in the world?
If Westminster is the mother of Parliaments, Tynwald must be the great-aunt since it was founded before the Abbey.
East Timor has recently achieved independence from Indonesia: does Mr Buiter wish to reverse this? Andorra is not French and the Isle of Man is not and never has been English (nor are the Channel Islands). Jersey has (and has had for many years) higher standards than most countries in the EU.
And if any of you want to discuss the ability of certain “sovereign states” to encourage individuals to disobey the laws of other states, may I suggest you consider what His Holiness could say about Ms Merkel and the encouragement of divorce (I am not a Roman Catholic but, as a mathematician rather than an economist, I did have to take an elementary course in logic)
The big prize is NOT Switzerland - it is called the United States of America, which split off from the British empire because a minority of its inhabitants objected to paying taxes levied to pay the cost of defending them from the French and were prepared to undertake terrorist tactics against the majority who wished to remain under British rule. So, if Mynheer Buiter is right, let us reabsorb it and apply the English rule of law, regardless of the views of the majority of its residents, including abolishing the supposed right to own guns, levying UK levels of tax on petroleum products, etc.
Also, I fail to see how you can vote to declare 24 Micheldever Road, London independent if you have no voting rights. How many inhabitants of 24 Micheldever Road, London are adult citizens? This last comment may seem stupidly pedantic but if you’re trying to look clever to score points off Tim Hedges, who made a perfectly reasonable comment, you should, at least, try to get things right
Thank you Willem, This debate should have started twenty years ago. The tax havens function like pirates from an earlier age; preventing a percentage of legitimate trade from reaching its proper destination. A strategy to avoid paying your fair share is no different to stealing another person’s
Posted by: GJW | February 21st, 2008 at 11:44 pm | Report this commentJohn, your comparison of tax havens to the pirates’ lairs of yesteryear is most apt. No doubt the Barbary pirates were appalled at the infringement of the sovereignty of their pirate communities in North Africa, which vanished with the French conquest of Algiers in 1830.
From a more contemporary perspective, the provision of tax havens can be considered a form of state-sponsored terrorism, attacking foreign states not with explosives and guns, but by undermining their tax bases and the legitimacy of their tax regimes.
Posted by: Willem Buiter | February 22nd, 2008 at 12:22 am | Report this commentYour ramble is quite absurd. We will continue to use ‘offshore financial centres’ and the world will continue to turn.
You’re so called ‘respected states’ are themselves investing into the offshore world. If we blocked the US & UK governments from accessing their offshore funds, you would experience financial meltdown. Offshore Financial Centres make the world turn. Accept it.
For all your experience, you are lacking in some knowledge.
Posted by: NR Horse | February 22nd, 2008 at 2:04 am | Report this commentWhat else can keep spendthrift ne’er-do-well politicians honest but the threat of losing revenue when they vote for high taxes? I’d feel like a kangaroo in the headlights if tax minimisation was banned here.
Posted by: Tom | February 22nd, 2008 at 3:31 am | Report this commentAlso, Buiter, academic bulldozer that you are, your musings are the theatre of the absurd. Ask yourself why your views are light years from the mainstream and from the markets. Your column is a tsunami of b******t.
Dear Dr. Buiter:
Regarding the Barbary Pirates.
Let’s look at this by supposing that you were Captain Buiter of the schooner St. Mary and that you had been in the business of sailing to London each Thursday to sell a load of oranges in exchange for a load of apples. Each Thursday you go to the same man at the dock who trades you an apple for each orange.
Then one Thursday, on the first of the month, a ship hails you at the mouth of the Thames. You pull alongside and a man on the ship offers you TWO apples for each orange.
The next Thursday, on the eighth of the month, you are making the same trip, and another ship hails you at the mouth of the Thames, just like last week. You pull alongside and a man on the ship tells you he will rape your wife and kill you if you do not give him your oranges forthwith.
Dr. Buiter, I know English is probably not your first language, but the man you met on the first was a “businessman”; the man you met on the eighth was a “pirate”. You would do well to remember that distinction in the future.
—-
It is heartwarming to know that the rise of the Internet and the fall in travel prices all but guarantees that the likes of Dr. Buiter are on the wrong side of history. It is possible that they have a small window of opportunity—if they could only stop the “tax havens” now, then perhaps they can live their well-feathered lives off the backs of the taxpayers of the Western “democracies” a little bit longer. The idea of using Liechtenstein as a wedge between Switzerland and the rest of Europe is really quite brilliant, in the Bismarckian sense.
But even the likes of Dr. Buiter ought to know that a declaration of war by the European Union on the Swiss Federation (which is what a blockade on essential goods amounts to, remember) is almost certain to tear apart the European Union itself into pro and con camps. You may be able to get Germany to mobilize the Bundeswehr and the Luftwaffe to keep tabs on the Swiss border (and shoot anyone who tries to run the blockade), but do you think the Finns, Estonians, and Greeks are going to be on your side?
This is really what you are talking about, Dr. Buiter. Blockades and forced annexation: that means the armies will once again be marching across Europe. And to what end? That you may delay the inevitable result, which is a world where the most valuable assets are virtual and a person’s physical whereabouts do not matter, so that “tax jurisdiction shopping” becomes something we all do by laptop… delay it, by a few years, perhaps. Because you know you cannot prevent it.
Posted by: Mike Smith | February 22nd, 2008 at 6:30 am | Report this commentFabulous article. I laughed out loud when I read the first comment and subsequent conclusion. “Why shouldn’t sovereign states be able to have the tax regime they want?” The conclusion that was drawn, however: that Germany is wrong to criticise Liechtenstein, was the simplistic and foolish one. The correct conclusion, which takes only a moment’s reflection to understand, is exactly the opposite of what the commenter wanted to say. It’s exactly because of the activities of countries like Liechtenstein that sovereign states like Germany are not able to have the tax regimes they want. And it isn’t just Germany whose tax system is undermined by places like Liechtenstein: it’s rich and poor countries everywhere. The emerging fight against tax havens transcends left and right: it is about repairing the integrity of governments and markets alike. The mood in the world is changing fast, and Barack Obama’s co-sponsorship of the Stop Tax Haven Abuse Act illustrates that this isn’t restricted to Europe. Buiter is right to catch the wave and to do his bit to reinforce it. Well done.
Posted by: Nicholas Shaxson | February 22nd, 2008 at 10:48 am | Report this commentAnother foolish comment attacking Buiter’s excellent piece: “Offshore Financial Centres make the world turn.” There is a very good analogy here: before the 1990s, it was quite widely accepted in many circles that bribery “greases the wheels of business.” What should have been obvious then, and is widely accepted now, is that this was only true in a very narrow sense: it was (perhaps) good for the briber, but the negative effects for everyone else were orders of magnitude greater than the small localised benefit. The answer was and is to set up overarching governance structures to prevent this. With tax havens, even if one tried to argue that the promotion of crime by Liechtenstein is good for Liechtenstein (though such tax havens generally have many problems too), it is unequivocally true that the damage to other states’ fiscal regimes and, perhaps more importantly, their democratic systems, is far greater than any benefit Liechtenstein might derive from offering criminal services. The answer, once again, is to set up overarching governance structures. Because the abusers in the case of tax havens are whole nation states, these governance structures must be global, not national. So international co-operation is the answer. That is why Buiter’s last sentence “If the EU, the US, Canada and Japan were to take a united line on this, things could change very quickly” is right on the money. I wonder, though: wouldn’t others be interested too? As an example, South Africa’s Finance Minister Trevor Manuel recently made a fine speech on this at an OECD meeting in Cape Town in January. China, India: wouldn’t they be interested too?
Posted by: Nicholas Shaxson | February 22nd, 2008 at 11:10 am | Report this commentI am from the Isle of Man. I pay tax to the Isle of Man Government. This tax goes towards the public services of our democratic little country which does not receive a penny from the UK or EU.
Does Dr. Buiter think I am a tax avoider?
Posted by: Charlie | February 22nd, 2008 at 11:49 am | Report this commentI must wonder if those defending the right of tax havens to set low rates of tax are being deliberately obtuse. The issue here is not how such states choose to tax their own citizens/residents, but rather their deliberate use of their legal systems (e.g. bank secrecy laws) to facilitate criminal activity by citizens/residents of other countries. These are aggressive acts against the countries that suffer from such criminal activity, and rightly deserve a strong response (though I disagree with the particular responses suggested by Prof. Buiter).
Posted by: Thomas S. | February 22nd, 2008 at 12:52 pm | Report this commentThe Lord Mayor of London visited the Isle of Man last November and was quoted on the local radio station as saying:
>>The Lord Mayor of London has told a business audience he would be delighted to promote the Isle of Man’s business case on his travels aboard. Alderman David Lewis was speaking in the first of a planned series of addresses under the heading ‘The Chief Minister’s International Lecture Series’, at the Mount Murray Hotel. He applauded the relationship between the City and the Island<<
The City loves the Crown dependencies.
Posted by: Charlie | February 22nd, 2008 at 1:28 pm | Report this commentThomas S.,
Tax avoidance is neither criminal nor illegal.
Nor are these countries havens for criminals as you’d be well aware of if you researched the matter.
While proceeds of crime may have been stashed in tax havens in bygone days, these days the KYC requirements of banks in tax havens are every bit as stringent as those applicable to European banks.
Until the laws are changed this activity is simply not criminal, making your point… well pointless and irrelevant.
It is therefore you who is being obtuse dear Sir.
Posted by: Jonathan | February 22nd, 2008 at 1:36 pm | Report this commentCharlie makes a wholly untrue claim.
The Isle of Man is subsidised to the tune of £270 million a year. That’s over £3,500 a head.
See http://www.taxresearch.org.uk/Blog/2007/03/18/the-uk-paying-the-isle-of-man-to-be-a-tax-haven/ for the evidence.
Richard Murphy
Posted by: Richard Murphy | February 22nd, 2008 at 1:51 pm | Report this comment>>a wholly untrue claim<<
The arrangements you refer to were amended in the 2007 Manx budget. You need to come up with new figures to substantiate your argument.
Posted by: Charlie | February 22nd, 2008 at 2:13 pm | Report this commentThomas S.,
100% correct.
But if it was illegal in any case then what’s the problem?
Surely then the Lichtenstein banks are obeying the letter of their applicable laws and the German taxpayers are breaking theirs?
So who is really at fault here - the taxpayers who broke their own laws pertaining to tax evasion or the banks who obeyed theirs?
I find it rich of Merkel to call for the changes in a law in another country even though the Lichtenstein banks serve clients from a variety of countries where the practice is totally legal.
It just seems to me the German tax authorities are passing the buck and excusing their own taxpayer’s criminal behaviour.
They should pursue those in their own country who are breaching the law!
Posted by: Jonathan | February 22nd, 2008 at 3:00 pm | Report this commentJonathan,
Thank you for confirming my suspicion.
Tax evasion is illegal under § 370 of the Tax Code (Abgabenordnung) of Germany, and is punishable by up to five years of imprisonment, or fines. As I suspect you know, the current probe in Germany, which prompted this discussion, involves alleged illegal tax evasion (not tax avoidance) by German citizens/residents, which may have been facilitated by the the LGT Group of Liechtenstein.
Posted by: Thomas S. | February 22nd, 2008 at 3:23 pm | Report this comment“John, your comparison of tax havens to the pirates’ lairs of yesteryear is most apt. No doubt the Barbary pirates were appalled at the infringement of the sovereignty of their pirate communities in North Africa, which vanished with the French conquest of Algiers in 1830.”
Sir,
Posted by: John | February 22nd, 2008 at 3:48 pm | Report this commentyou are far from the first person to misquote me in order to attack me for an argument that I have not made, but I still dislike it. I have made no such comparison - unless you are trying to say that the Netherlands was a pirates’ lair in 1581. I did say that “I believe that we have a responsibility for our own behaviour. Buiter’s behaviour in calling Jersey and the Isle of Man “crime-fostering enclaves” falls below the standard that I demand of myself.”
I now have to ask whether your ability to read also falls below those standards.
As for the rule of international law - when did it sanctify the oppression of small nations by larger ones, simply because they are small? If Yorkshire declares independence will you advocate that it should bully the Baltic states and force them to play cricket?
Jonathan,
The issue is cooperation. Governments of responsible states typically cooperate in criminal matters, so that, for example, a thief cannot escape punishment by simply moving stolen goods from one country to another. However, the governments of a few states refuse to cooperate in the specific case of criminal investigations involving allegations of tax evasion. Why do you suppose that is?
When the government of one state refuses to cooperate with the governments of its neighbours in enforcement of their own laws against their own citizens suspected of having violated them, why should the neighbouring governments then feel obliged to cooperate with this government in other matters? I can’t see any particular reason.
Posted by: Thomas S. | February 22nd, 2008 at 3:58 pm | Report this commentThomas S.,
Very relevant and apt point.
I must stress I am not anti the removal of tax havens.
I do, however, feel that it is the country with the citizens that transact with these tax haven countries that should be the ones left holding the ball.
There is absolutely nothing stopping Germany or the UK, or any other country for that matter, from passing legislation making it illegal for their citizens to establish trusts in tax havens or from depositing their funds in banks based in tax havens and then prosecuting those that transgress.
This has been done successfully in mnay countries over the years.
Take away the demand and the supply side of the industry will shrink commensurately.
I simply feel it is their problem and imposing their will, and effectively making it another country’s problem, is neither apt nor in the spirit of co-operation.
Should the Germans wish to prevent their citizens from doing so then ligislate it and police it and dont expect another country to do it for you.
The United States has effectively outlawed their citizens from legally holding funds in such tax structures and they achieved that without forcing their will upon another country.
Where I feel pressure can be exerted is where the tax haven wants to join a body, such as the European Union.
Then such pressure is warranted and be exerted as a prerequisite to joining.
But blockading and forcing a country to bend to your will simply because of your size or political and military might is simply not on in my opinion.
Posted by: Jonathan | February 22nd, 2008 at 4:12 pm | Report this comment>>The United States has effectively outlawed their citizens from legally holding funds in such tax structures and they achieved that without forcing their will upon another country.<<
The United States can only effectively outlaw such tax structures if other states inform the US of about US citizens using such tax structures.
Liechtenstein is not cooperating with Germany as it is with the United States (in information exchange). So it seems only reasonable that Germany asks Liechtenstein to get the same deal that the US got in their latest tax treaty.
Posted by: Jeju Cornell | February 22nd, 2008 at 5:13 pm | Report this commentJeju,
But the Germans (and neither Buiter) arent asking for information - they’re asking for law change.
And thats the very crux of the issue.
Posted by: Jonathan | February 22nd, 2008 at 6:18 pm | Report this commentAs far as I know the German Liechtenstein tax treaty applies the principle of double criminality for issues of information exchange. Any information that Germany may receive from Liechtenstein may only be used for prosecuting criminal acts if such an act is defined as criminal in both countries. However, tax evasion is not a criminal act in Liechtenstein.
So the solution would be to remove the double criminality criterion from the double tax treaty. However, not surprisingly, Liechtenstein is not very enthusiastic about doing that as secrecy is a cornerstone of their business model.
Posted by: Jeju Cornell | February 22nd, 2008 at 8:18 pm | Report this commentEspecially with Germany they are hesitating because most of their customers are German citizens and not US citizens (US citizens go to other tax havens with beaches which are more close by.)
Jeju,
Posted by: John | February 22nd, 2008 at 10:09 pm | Report this commentWhat are the Germans offering to Liechtenstein?
(Genuine question - I haven’t access to the data. What I had read was that tax evasion was a criminal act in Liechtenstein but that taxable income from trusts was defined differently)
Officially, it is always claimed that there exists no issue linkage. (So Liechtenstein becoming part of the Schengen area has nothing to do with Liechtenstein signing certain tax treaties.)
Officially, it was also claimed that Switzerland taking part in the EU Savings Tax Directive scheme had nothing to do with the bilateral treaties between the EU and Switzerland.
However, one is tempted to see connections. For Switzerland (Swiss multinationals in particular) it is very important to remain perfectly integrated in the European Economic Area. So they offer something in return: The Swiss transferred money to Eastern Europe (just like regular rich EU members via EU funds do) and they signed up to the EU Savings Tax Directive on their own terms (no info exchange, just taxes on fixed income assets…)
Liechtenstein, however, does not have multinationals and you can run a town of 35000 people easily on the fees for secretive legislation only.
Maybe the EU should offer to Monaco, Liechtenstein and Andorra what the US offered Bermuda for information exchange: Some preferential tax treatment for firms that organize conferences there. I wouldn’t mind a conference in Liechtenstein or Monaco, but maybe organizing conferences is less fun than managing trusts of tax evading money.
However, one is tempted to see connections. For Switzerland (Swiss multinationals in particular) it is very important to remain perfectly integrated in the European Economic Area. So they offer something in return: The Swiss transferred money to Eastern Europe (just like regular rich EU members via EU funds do) and they signed up to the EU Savings Tax Directive on their own terms (no info exchange, just taxes on fixed income assets…)
Liechtenstein, however, does not have multinationals and you can run a town of 35000 people easily on the fees for secretive legislation only.
Maybe the EU should offer to Monaco, Liechtenstein and Andorra what the US offered Bermuda for information exchange: Some preferential tax treatment for firms that organize conferences there. I wouldn’t mind a conference in Liechtenstein or Monaco, but maybe organizing conferences is less fun than managing trusts of tax evading money.
Posted by: Jeju Cornell | February 23rd, 2008 at 12:13 am | Report this commentWillem,
Keep up the good work on your somewhat controversial posts. I’m guessing you’re playing the Devil’s Advocate to a certain degree?
As far as tax havens, for citizens, it’s a nice check against the home state as to be somewhat prudent with their tax policies, to avoid further off-shoring
Since you believe in the primacy of citizens rights over other entities including the state, I believe you ARE playing the devil’s advocate on this post. (Correct me if I’m wrong)
Are you familiar with Michael Hudson’s work on Corporate Tax Offshoring? The oil companies learned decades ago to set up their industry pipeline to take profits only in low tax/no tax countries.
In Gavekal’s “platform companies” MNC’s will have to set up their headquarters offshore to be competitive in the tax avoidance area.
Posted by: groucho | February 23rd, 2008 at 11:34 am | Report this commentI am amused that this article is written by someone who (i) is a Dutch citizen and therefore a non-dom, paying zero taxes on his income abroad, which, anyone has to assume, is where he keeps his savings and who (ii) worked for years at EBRD, a London based supranational institution and therefore tax haven, where he paid zero taxes to the UK Inland Revenue. Delicious hypocracy and double standards.
Posted by: marcus izkustvo | February 23rd, 2008 at 5:29 pm | Report this commentFor a good Hudson interview, google this:
An Insider Spills the Beans on Offshore Banking Centers
Posted by: groucho | February 23rd, 2008 at 7:24 pm | Report this commentan Interview with Michael Hudson
It seems to me outrageous some of the participants resorting to personal insults to handle their arguments. Dr.Buiter just points out a very simple thing: most of the people pay their taxes and just a few avoid it using ex western countries laws even though they live within them and enjoying all their benefits. It´s just not unfair. In some extreme cases those practices can even explain the economic collapse of whole countries. Massive offshore tax evasion in Argentina is a case in point.
Posted by: rogelio velasco | February 23rd, 2008 at 7:54 pm | Report this commentYour comments suggests an inclination towards an “economic totalitarism” that sounds very strange. The concept of Nation itself requires respect no matter how big a nation is: this was understood since the very beginning of Nations back in 1700s.
Posted by: Nicola Marinelli | February 25th, 2008 at 11:33 am | Report this commentGovernments have to get used to tax competition: the only answer thay can give is by lowering their expenses and their taxes. Wasted public money is more repulsive than evasion to me.
[…] Read the whole thing. […]
Posted by: Saber-Rattling Academic Urges Aggression, Bullying, Sanctions, and Annexation. « First Friday Collective | February 25th, 2008 at 11:35 am | Report this comment[…] Right. Let’s start killing people over taxes. Great idea, Mr Buiter. […]
Posted by: Oh my… « Uncompahgre Gorge | February 25th, 2008 at 6:08 pm | Report this commentWhat a brilliant suggestion to just blockade these countries and beat them into submission! They are small, puny little countries after all so no harm no foul. Forget the fact that some of these played important roles during world wars to protect the assets of depositors from oppressive governments (you reading this Germany?). Forget the fact that these are sovereign jurisdictions. The new and almighty EU needs to flex its muscles in the name of tax hegemony for all! Better yet, let’s just have one big New World Order and lay taxes at constant rates around the world stifling competition and all but guaranteeing global dominance by the rich countries over the small and relatively weak. Then we can continue handing out loans to these countries that they can never repay and really dominate them….. you know, like the colonialist days. Why stop there though? Let’s just annex those small countries as well and officially go back to the colonialist days! I am with you Professor!
Down with banking secrecy! How dare people want to protect their assets in jurisdictions that from maniacle dictators, unstable governments, governments who steal from the people through measures which create intolerable inflation, governments who impose welfare, socialist states and oppressive tax regimes; how dare international companies seeking to maximize profits by minimizing taxes and thus creating more jobs and opportunities. After all, that is money that could be extracted by government to hand to some lazy slob who does not feel like working.
Professor, you sir are naive. Tax competition is good for the world and keeps governments in high taxing countries in check. In fact, those living in formerly socialist states with intolerable tax regimes who are now seeing tax relief can thank the “tax havens” of the world for helping to remove the foot of the government from the throats of the citizens. There will be global tax hegemony, just not at the high levels the governments of welfare states desire. The trend is toward lower taxation and globalisation and the countries that realize it too late will be left as shells of their former selves when the transformation is complete.
Lastly, when the biggest tax havens in the world (the UK and USA)change the laws within their own countries to match what they are trying to impose on the rest of the world, I will listen. Until that time, all of the rhetoric from any of these hypocrites is mindless drivel.
Posted by: Bobby B. | February 26th, 2008 at 6:31 am | Report this commentTax havens undermine the ability of nation states to set their own taxes. The same people who support this process and/or benefit from it would most likely be first in line to rail against other infringements of national sovereignty.
But, as has been suggested in some posts above, the best way to address this is to focus on the state’s own citizens rather than coercion of the havens. Banning the use of offshore accounts by British (etc) citizens would be the first step and then any diplomatic pressure on tax havens could focus on co-operation on this sole point, rather than making tax havens overhaul their entire system.
The argument raised by a few people above that tax havens help guard against excessive taxes ignores that this is nevertheless a profoundly anti-democratic process. If a country’s people choose to set high taxes (by voting for a particular government) then the choice for all people in that country should be either to pay up or leave. Remaining, but stashing cash with the help of a third party, goes against the agreement inherent to democracy that we obey the rules even when we disagree with them.
Posted by: James Clarke | February 26th, 2008 at 11:51 am | Report this commentI’m glad this article was written. I’ll give it to any person that thinks the EU is founded on democracy and is an overall good institution. I’d expect what the author says of annexation from China and Russia.
Posted by: rj | February 26th, 2008 at 5:59 pm | Report this commentThis marvelous writer pretty much takes up
where Willem Buiter left off!
(Go about 50% down the page.)
http://elainemeinelsupkis.typepad.com/money_matters/2008/02/elaine-meinel-7.html
Posted by: Frederick N. Chase | February 26th, 2008 at 8:48 pm | Report this commentProf Buiter you forgot Singapore!
Posted by: domi | February 27th, 2008 at 12:41 am | Report this comment“Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board. The special status of these strange entities is not cute; it’s an enabler and facilitator of unethical and illegal behaviour.”
Posted by: Angus Slater | February 27th, 2008 at 6:04 pm | Report this commentSorry but I think that the independance of my country, in this case the Isle of Man, deserves something mroe than a total absorbtion into the dirty, badly managed, and financially unstable UK.
So would this annexation policy make it legal for countries to sieze each others land again 19th century style? You should think before you write, the precedent you speek of would seriously disturb the world order.
Posted by: jmklein | February 27th, 2008 at 6:25 pm | Report this commentEuropean Tax Lebensraum Theory?
Posted by: Nun | February 29th, 2008 at 2:04 pm | Report this commentConsidering the Professor Buiter’s list of money Laundromats available in EU, from microstates to large countries, Monaco, Liechtenstein, Andorra Guernsey, Jersey, Isle of Man Luxembourg, Austria, Cyprus and Switzerland, it is surprisingly low the number of rather affluent Germans, members of the so called tax evasion/money laundry fraternity that are not sleeping too well. One should ask, was it money well spent? Did German tax authorities withheld tax on the payment they made to the non domiciled whistleblower, did he declared it on his country of residence or were tax authorities facilitating the whistleblower tax evasion?
Corruption, drug and human trafficking, Italian, Russian and other mafias earnings from extortion, kidnapping, robbery, etc. war crimes, illegal sale of weapons and terrorism are on top of the list of criminal activities which money laundering is used for. Surprisingly the microstate of Liechtenstein fights also these practices, but unfortunately not the affluent German or UK tax payer’s tax evasion practises.
I do agree that tax evasion is morally a crime and undermines efforts of countries to redistribute wealth and provide the basics to its communities, however not all countries of the so called civilized world redistribute wealth and provide the basics to its communities, despite collecting taxes with immoral rates and spending public money immorally to support a heavy and useless bureaucratic machine, services, cabinet members and assistants, consultants that don’t work, commissions that evaluate commissions, projects that are abandoned after elections, indirect funding of political parties, funding countries and Development Banks to finance projects and consultants sometimes hidden behind offshore companies, belonging to who knows whom, for projects that never happen.
Belgium and Dutch dentists are not used to pay their taxes? I have no idea, but the issue under discussion is not Professor Buiter’s dentist.
The issue is the brilliant theory of a Professor of European Political Economy from the well known London School of Economics and Political Science.
Professor Buiter’s proposal to solve the problems of tax evasion, is in fact a whole new theory of an European Tax Lebensrau that would allow a new Ancheluss against the yellow (micro)states of Jersey, Guernsey and the Isle of Man, that on his own words, should simply be absorbed lock, stock and barrel into the UK. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation by France and Austria respectively (once it abandons its bank secrecy laws) (or, in case it does not abandon its bank secrecy laws it suggests something like once Austria is annexed by Germany)). Switzerland, the luckiest of all would only be subject to sufficiently stringent economic sanctions (after all, it is landlocked!,) I must say that I am truly fascinated with this all new theory to redesign European borders, my congratulations Professor Buiter I would be delighted to attend one of your classes most be an experience itself.
[…] pose a grave threat to the world. Some of these jurisdictions should be subject to sanctions, he writes, but in other cases he urges much more aggressive tactics, including annexation. …… […]
Posted by: cttaxed.com » Blog Archives » Obama, Liechtenstein, Protectionism and The London School Of Economics | February 29th, 2008 at 3:01 pm | Report this commentMr. Buiter is confused about who is stealing from whom. If Germany doesn’t want its citizens “evading” taxes, it should lower its confiscatory tax rates.
Posted by: David N. | March 2nd, 2008 at 9:05 am | Report this commentIf Germans want low taxes, they should vote for them (along with voting for the lower levels of social security and care that low taxes would bring). As long as a democratically elected German government is going after lost revenue that the German people have mandated it to collect, I do not see what the quibbling is about……
Posted by: NM | March 19th, 2008 at 1:53 pm | Report this comment[…] number of proposals of how to clamp down on Europan tax havens, but none as far reaching as Willem Buiter, who writes in his blog that Europe’s tax havens should either come clean, or face annexation […]
Posted by: open end funds » Will Merkel stitch up an alliance with the Greens? | March 28th, 2008 at 1:30 pm | Report this comment[…] in full agreement with Larry (but without implicating him in any proposals for blockades (see e.g. Blockade the tax havens and Non-doms and tax havens)). Before I get flamed again on the issue: I don’t object to low […]
Posted by: FT.com | Willem Buiter’s Maverecon | Economic Internalionalism 101 (for US Presidential Candidates) | May 5th, 2008 at 10:47 pm | Report this comment