Feb 25 2011

The tax haven in the heart of Britain

Posted by: Nick Shaxson in: Tax Havens, Thoughts

That’s the headline of my article in the New Statesman (top story on the website, though I haven’t seen the hard copy.)

There are a couple of comments underneath, which find it hard to deal with the idea that tax havens aren’t, fundamentally, just about tax.I posted a reply there, which I’ll repost here. It goes as follows:

Matthew Evans, FA, Shiv, Stu (are you all friends?) – as I explained very clearly in my article, there’s a widespread misconception of tax havens out there. If you persist in seeing tax havens as being only about tax, then you will never understand the offshore phenomenon or, for that matter, the City.

At the risk of repeating myself, tax is just one part of what tax havens are about – which is why the term ‘tax haven’ is a misnomer. What tax havens are about ultimately is the capture of policymaking by financial interests, primarily from elsewhere. The aim of this capture is to provide those financial interests with escape routes from whatever they don’t like at home – whether it be the provision of low or zero taxes, or of secrecy, or of escape routes from criminal laws or from financial regulation, or whatever. Investigate any tax haven and you will see this pattern (in my book Treasure Islands, the chapter focusing on Delaware and Jersey – which explores issues that in each case have nothing really to do with tax –  probably illustrates this capture most clearly.)

The City of London Corporation, and the UK more generally, display a range of offshore characteristics.

There is, of course, the effective capture of policy-making in the UK, which I think few people would disagree with. Beyond this, there are three main offshore themes at play here.

First, the City, and the UK more generally, provide escape routes to non-residents. It offers various forms of secrecy, protection from the criminal laws and financial regulations of other jurisdictions, and various other loopholes, as I explain in great detail in Treasure Islands. There are some tax loopholes – the ‘non-domicile’ feature is a case in point – but this probably isn’t the prime offering. This ‘escape route’ feature is a first set of reasons why the City (and the UK more generally) is a tax haven.

Second, there’s the escape-from-Britain aspect of the City Corporation – which this article explores.Compare the City Corporation with another more traditional tax haven. Bermuda, for example, is a British Overseas Territory partly independent from, but also partly controlled by, Britain. That is part of its tax haven character. And so it is with the City. It has partly carved itself out from the country, while also remaining rooted within it. This offshore-island status gives it special powers and privileges which are put to the service of freedom for finance. The article gives some examples. The voting system, which makes effective opposition politics impossible, is one element of this carve-out. The City Corporation’s official – I repeat official – role as a global lobbyist for the financial services industry, which is a really weird thing for a municipal authority to be doing, is another. This half-in, half-out, rather peculiar island-within-Britain status is the second big part of the City Corporation’s offshore character, and a major source of the power of the UK’s financial services industry.

The third big part of its offshore character is Britain’s network of tax havens around the world – most notably the Crown Dependencies and Overseas Territories, which, among many other things, feed very large sums of bank deposits, assets, and the busness of handling money, up to the City and the UK financial services industry. When you understand this, it becomes easier to understand why the Lord Mayor and other representatives of the City Corporation, and their allies, lobby so hard and so regularly in favour of tax havens. Here is one random example of that, which I’ve just plucked from Google: http://bit.ly/eggei6

So, to summarise, the City and the UK’s tax haven / offshore status hangs on several things: first its escape-route offerings to others (whether on secrecy, tax, financial regulation, or whatever;) second, its status as a kind of offshore island lodged half-inside, half outside, the British nation state; and third, the global tax haven network which feeds it. The first two are standard tax haven fare; the third is a special British thing – although to be fair, the financial services industries in big tax havens like the United States are also fed by tax havens, especially nearby: Cayman funnels huge sums to Wall Street too.

And overall, the British state has been very substantially captured by the interests of global financial capital. Who could seriously disagree?

One last thing – there were a couple of glitches in the City chapter of Treasure Islands in the UK edition, which I note here and here, with updates.

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