Low tax countries benefit developing world

Richard Teather, author of a recent report commissioned by Cayman Finance on the effects of the introduction of direct taxation in Cayman was one of the featured speakers at the Cayman Finance Summit. Basia Pioro McGuire reports.
 
Low tax jurisdictions play some obvious, and some much less obvious roles in global economies, according to tax specialist Richard Teather.
 
In his speech at the Cayman Finance Summit, Teather argued that, rather than being a bandit reaping the rewards of the global financial system, Cayman is actually contributing to the well-being of workers in high-tax onshore countries, as well as playing a key role in third world development.
 
“Aside from the fact that it is the right thing to do, tax competition has great benefits to all society not just those who personally take advantage of it,” said Teather.
 
“So not just the workers in the finance industry, the people in the low tax jurisdictions, it is the citizens of high tax jurisdictions who are benefiting from this.”
 
He argued that the ability of countries like the UK to raise taxes is constrained by the fact that there are plenty of other lower tax countries out these and if the UK puts its taxes too high, it is going to lose capital, lose entrepreneurs, lose high-ability workers, lose GDP and lose tax revenues.
 
“By having low tax countries like Cayman, it prevents taxes going up to 98 per cent as they did in the UK several decades ago. That is why governments like the UK US and Germany don’t like places like Cayman,” said Teather.
 
“And you have to be very careful when they start telling you that you need an income tax, because ask yourselves, have they really got the best interest of the Cayman Islands at heart, or are they thinking of their own interests?”
 
“The huge result of this is by having low tax jurisdictions therefore we have lower tax rates around the world, and high tax jurisdictions as well as low tax jurisdictions have their tax rates lower than they otherwise would be.”
 
He further argued that economists are pretty much agreed across the board that lower taxes mean increased wealth, adding that they also encourage entrepreneurship, encourage savings and investment and encourage work.
 
“Through all of these mechanisms we are creating more wealth, providing more jobs and providing more government revenues as well, so lower taxes mean more wealth for everyone,” he said.
 
He countered the argument that the only people benefiting from tax competition are the multinationals, the rich and the people working in the financial sector.
 
“Because of the benefits of growth of international finance, most of the benefits go to general citizens and workers in the high tax countries,” said Teather.
 
He pointed to a study done at Oxford University, which concluded that of $100 of tax taken out of a business, on average $75 of the tax comes straight from workers pockets through lower salaries, lower pay rises and less employment.
 
“And the converse holds true, if you decrease corporate taxes by $100, $75 of that flows through the workforce, either the existing workforce or even more importantly the currently unemployed, who are able to find jobs,” said Teather.
 
“The effect of this is enormous. This isn’t just a theoretical economic construct, this was looking at thousands of companies, and what actually happened when their corporate taxes changed.”
He also noted that it doesn’t just hold true for places like the UK or the US, it applies to places like Cayman.
 
“In Cayman the effect [of a tax] would be far greater on the workforce because you have got a massively mobile finance industry here. And places like the US and the UK know that. For example the UK managed to poach the Eurobond market from New York, back in the 80s when the US decided to tax interest payments on corporate bonds. Virtually overnight the entire bond market moved to London, and it could move somewhere else, and the UK realises this and they carve out certain sections of their economy from these high taxes to try to protect them,” he said.
 
“It’s not just the wealthy it’s not just the connected it’s not just the people working in finance who are benefiting, it’s the workforce here in Cayman and in the UK.”
 
Another point raised was the argument that Cayman is actually playing a key role in assisting developing countries.
 
“With regard to ridiculous claims that low tax jurisdictions kill thousands of babies each year in Africa, that is completely untrue. I just recently published a report which analyses one of the worst of those cases, and there is no foundation in it whatsoever,” he said.
 
“Quite the contrary, another big beneficiary of low tax jurisdictions are people in the third world,” continued Teather.
 
He explained the key is the tax role places like Cayman play in terms of vehicles like retail funds.
 
“When you are trying to pool investment capital from around the world, the international tax system if you are trying to do this does not work very well. The OECD models might work for multinational companies with subsidiaries in different countries, but once you start looking at retail funds, collecting smallish investments from around the world and pooling them, these systems do not operate efficiently. If you have your investor in one country, your fund in another, and investing into companies in a third, you can quite easily get taxation at each level there,” he said.
 
He noted that: “With three lots of taxation each at 40 per cent you are not going to end up with very much return on your investment. The end result is you will have far less global investment.”
 “Until the OECD and the international tax people and governments of the UK and US get their acts together and have a sensible international tax system, what we do for the moment is we pass the funds through a place like Cayman,” he argued.
 
He noted that by doing this low-tax jurisdictions sidestep the whole problem of taxing global finance thereby encouraging it.
 
“If you try to set up a fund in the UK to invest into some of the smaller Far Eastern countries or African countries you would struggle to get enough investors from just one country. In order to set up a properly functioning developing country fund you need to collect investments from all around the world. You need a broad pool of investors to be able to draw on,” he said.
 
“But if international practice or increasingly, international investment regulations, prevent you from doing that, the biggest losers are going to be the developing countries who are not going to be getting the investors providing them with the capital they need in order to grow.”
 
“It’s the funding, the global finance, that’s available through places like Cayman that’s actually going to allow African and Far East nations to stop being recipients of aid and create their own dynamic economy and provide for their own people. And that is one of the huge benefits of low tax jurisdictions, providing that global finance by being that vital conduit in that global finance industry you are helping not only your own country and developed countries like the UK but also providing a huge boost to developing nations as well.”
 
Turning to the prospect of taxation in Cayman he argued against all direct taxation in favour of cutting government spending.
 
He offered a caveat for anyone considering taxation, noting that different branches of the finance industry businesses go to different places partly due to geographical factors, tradition, or legal reasons, but largely because of the tax systems.
 
“What you can’t do is look around and say well Jersey has a 20 per cent income tax and is an international tax centre therefore Cayman can have a 20 per cent income tax as well,” he said.
 
“The fact is you’ve got particular strengths in the finance industry here, those particular strengths are driven off partly geographical factors, but largely your tax system, and if you change your tax system you’ll be losing a large part of that finance industry.”
 
In the end, he  conceded property tax would be the  “least damaging” form of taxation, as property can’t go offshore once a tax is imposed,  and a property tax doesn’t discourage growth as a business can grow in a building without incurring additional tax.
 
“Annual property tax is less damaging than stamp duty because stamp duty  is a transaction tax and discourages people from moving in and buying,” he added, contrasting it to a lower annual property tax.
 
“If you are going to do any form of taxation that is probably the least bad one.”

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