Chamber of Commerce Economic Forum

Grand Cayman,  Cayman Islands

30^th May 2003

"Harmonisation of Taxes and Regulations: A European Initiative"

Presented by
Dr Roger Bate

At the G8 meeting that starts on Sunday in Evian France one of the key themes will be globalisation and its role in helping or harming developing countries. On balance European politicians will discuss more of the potential harms of globalisation, whereas the US will discuss more of its benefits.

Each of us here has an opinion or at least a feel of what globalisation is. I suggest that most of us see it as the expansion of the global market and particularly an expansion of the reach of large multi-national corporations. Whether we view it as a positive thing is not so important for my discussion today, but that is how the majority sees globalisation.

With the reach of multinationals increasing it is regularly argued by politicians and pressure groups that it is essential that global governance structures be expanded to ensure that these companies and the market in general doesn't get out of control (harming human rights, democratic stability, culture the environment and global health).

As a result from about the time of President Kennedy, there has been a slow, and now accelerating push for global governance, and away from the sovereignty of nation states. This process has always been driven by Europe (initially internal to Europe to avoid another World War). The global governance institutions that the pressure groups, bureaucrats and politicians promote include, international treaties on numerous issues such as climate change, chemicals and tobacco. There are proposals pushed by powerful and respected international bodies for agreements on labour standards, environmental protection and of course tax harmonisation.

These entail an entirely different form of globalisation, one that is rarely discussed, except in policy circles in places like Washington and London. But this governmental globalisation is beginning to have a significant effect, and potentially could have a far greater impact than the globalisation of corporate reach and market access most of us see as real globalisation. As you can probably guess I am more alarmed by the former than the latter.

Many people, especially Europeans, do not like to see American brands Marlboro, McDonald's or Coca Cola being sold on every street corner of the planet. But unlike homogenised government agreements from which there is little escape, one does have the choice not to buy these products. Jurisdictional competition is as important for Government as it is for business, perhaps more so because of the hegemonic (occasionally despotic) power they can wield.

And it is the financial harms to hegemony, caused by jurisdictional competition, which count most. Most of the major pressure groups, such as Oxfam and Greenpeace now spend their largest amounts of money and the lobbying time of their best and brightest at G8, IMF, World Bank, WTO type meetings, rather than haranguing people on street corners. Whether you are lobbying for baby seals, a smoke free world, or banking informational exchange its better to be annoying financial types (and the media who report about them) than members of the public who have no power and are rationally ignorant of policy decisions.

Harmonisation: Harmony or Harm?

 The European elite want harmonisation across the rich world, they argue that it will bring economic harmony, but the outcome will be more discordant with populations being fleeced by high-tax governments. Without harmonisation countries will continue to adopt diverse tax and regulatory structures, and the world's media (even if its through glasses tinted with the soft-red of mild socialism) will see the success of the lower taxed lower regulated economies – Iceland, Ireland, Luxembourg, Switzerland, Hong Kong, Singapore (even Cayman), as demonstrating that one doesn't need to be an economic giant to be successful.

As you all know lower tax countries have come under pressure to comply with OECD, FATF and EU concerns about tax evasion and money laundering. The claims of OECD and others have some legitimacy (especially in providing information about terrorists and other dangerous types), but not much. And they must be fought.

As I will point out in the next 20 minutes or so you, those, such as yourselves, coming under direct or indirect pressure on informational disclosures and other OECD demands are not alone. You have allies because you are in a much bigger fight.

I am a generalist, someone who spends a lot of time working on issues such as malaria, AIDS, water pollution, and development policy. You probably all know more about business and tax than I do. But before you walk out I hope I can persuade you that its vital to present your case with a human face, by explaining some other international cases, and their successes and failures. It is tempting to make purely an economic case when talking about tax harmonisation, but in many ways the most persuasive case (at least to the media and the general public) is more emotional, driven by fairness messages. Those at the CFP and elsewhere have done a good job of reaching the media, but more must be done.

The EU and its pressure group allies have worked at presenting fairness or egalitarian messages. You know the kind 'Its unfair that rich people can avoid tax'.

If we don't combat these messages more seriously, the world will be pushed by vested interests (primarily in Europe) towards a harmonised, homogenised global governance structure that will slow world growth to European proportions – something that the aspiring nations cannot afford (they desperately need to get out of poverty) and we shouldn't want.

Unfortunately, Europe is no longer an aspiring region. The usual distinction made in common talk is between the developing and the developed world. But I think this is misleading. The US is the richest country in the world but it is still aspiring like most of those normally called developing. Europe is not - it is developed but not aspiring. Originating in fear of a third world war it has become sclerotic, inward looking and above all happy with stasis. Of course I simplify – I know there are exceptions, but I maintain that the elite in Europe, is happy with its lot and wants to keep it, and even export its brand of fairness.

I want to give a few broad examples of harmonisation and message crafting, before we get on to the main tax concern here in Cayman.

1. CTF

Up the road in West Bay is a unique site. It's the world's only turtle farm. You may have been one of the 400,000 visitors that the farm receives every year (you may not have visited it since you were a kid). But this farm provides an interesting insight into the push for harmonisation of regulation. If someone tried to establish the farm today, they would likely fail, since it is deemed unacceptable by the UN CITES.

The farm was established in 1968 by American and British entrepreneurs, with the help of several Caymanians. The aim of the farm was to provide 'Conservation Through Commerce'. In 1968 turtle populations were being overfished and some sub-populations were becoming extinct because of the valuable products it provides (shell meat and oil).

The most dangerous time to be a turtle in the wild is in the first few days and weeks. Most eggs (maybe 95%) don't make it to being hatched and most hatchlings don't make it to the sea. Any turtle that survives to one year has a reasonable chance to make it to adulthood. What the farm did was to protect the eggs and increase the chances of turtles reaching adulthood. Within four years, after taking thousands of eggs from surrounding Carribean locations (most of which would have perished), the farm had 100,000 baby turtles growing to adulthood.

Now the turtle provides a great source of meat, leather, and its shell is worth a great deal in making decorative furniture boxes, and its oil is chemically similar to human oils and so is ideal in cosmetics. The market was there for the products. The farm was expanding rapidly and hoped to establish similar farms in different parts of the Caribbean.

Then in 1973 environmental legislation, ostensibly designed to protect the turtle, closed the farm down by denying it the right to trade its products internationally (through US ports like Miami). The farm litigated and through different owners continued the fight until 1983 when it was sold to the Cayman Government – primarily as a tourist attraction. But because of hard work and Cayman Government investment the farm is expanding, rearing turtles and has continued to push CITES to allow it to trade turtle products internationally. It almost succeeded last year, only to be thwarted by the German Government and an EU block abstention.

Every year CITES add species to its list of those endangered, and almost never is one removed from the list. Political correctness drives the process. The powerful EU block vote is controlled by conservative precaution (somewhat similar to a high tax welfare state), which cannot countenance risk taking, even if it is proved to be beneficial. If a species is listed by CITES officials they can claim they did their part in warning the world, but if they don't list then they will be criticised by pressure groups and the world's media if the situation for that species worsens. But the situation often worsens because of the real causes of species loss and CITES listing actually blocks solutions that would work.

For example, restrictions on trade continue to dominate wildlife protection, when the main cause of species decline is habitat loss. In my opinion trade is targeted because it is easier to interfere with since it involves international agreements, whereas habitat loss remains a sovereign decision. (Harmonisation of international trade law standards, made beneficial under the WTO are perverted to the ends of anti-trader anti-capitalists).

But there has been some good news, certain crocodile range states managed to push through the CITES process certain crocodile species de-listings. They won after commercialisation in Australia, and elsewhere, was demonstrated to be a success. Cayman can try again and hopefully will succeed, and bring benefit to the people of Cayman and show the way that local populations can manage wildlife for their own benefit if they are allowed to do so.

It will be essential that they hone their communications messages to explain how unfair the status quo is.

2. DDT

A similar (if apparently different) situation exists with respect to malaria control. International efforts to combat the resurgence of malaria have been hampered by political correctness driving harmonised 'solutions'.

Malaria used to kill millions around the world, including Europe and America. Oliver Cromwell died from it, Shakespeare wrote about it (as the ague) in eight of his plays, it was endemic in North America (killing many in Michigan up to Second World War) and it killed people on this island into the 1950s. From end of WWII it became a disease of the tropics (as it remains today), thanks largely to the use of DDT.

DDT (like globalisation) we have a view of, and I bet its that it harms the environment. After all Rachel Carson's book Silent Spring, did for DDT what John Grisham's book The Firm did for Cayman. But even today, after 50 years of studying the effects on billions of people, there are:

• No known replicable health effects
• The only harmful environmental effects from agriculture
• DDT eradicated malaria from 10 countries (and demonstrated amazing performance in Sri Lanka, India and South Africa).

It is still remarkably the most cost-effective method of malaria control, yet it is not promoted by any aid agency (who harmonise by promoting bed nets and discourage any use of DDT or any other insecticide to control the mosquito populations that spread malaria). The result is that malaria has bounced back in many places – brown babies are dying because of excess precaution (especially in Europe) leading to harmonised inappropriate solutions. And an international chemicals convention almost outlawed the global use of DDT.

Fortunately a pro-DDT malaria communications strategy of which I played a small role, defeated the greens by embarrassing them saying they cared more about hypothetical risks to wildlife in the North and cared nothing about the babies dying in Africa (see www.fightingmalaria.org for more details).

3. Excise taxes (and other EU taxes)

Tobacco and alcohol are legal products in most parts of the world, and they are taxed heavily in many places, especially Europe, in an attempt to raise revenue and to show disapproval of these products. In some instances, such as in several Scandinavian countries, the price of a pack of cigarettes or bottle of whiskey comprises over 80% tax. Tobacco tax revenue  makes up 4% of the EU's budget (and nearly 22% of the Chinese Government's budget comes from tobacco tax revenue).

Differences in tax rates across Europe, and the European Free Trade area, are significant. A pack of cigarettes ranges from about $1.50 in Greece to $8 in Sweden. Smuggling is a major issue and there has been a push by European health and trade officials to harmonise excise taxes. The recently agreed WHO Convention on Tobacco (once again driven by European nations), will push for global harmonisation of excise tax rates.

Harmonisation of tax – is it the answer?

The problem of smuggling is often used by those in favour of harmonising European tax levels, as another argument in favour of such harmonisation. EU officials, and the OECD, argue that since much of the EU internal smuggling is due to differential tax rates within the EU, that those tax rates should be harmonised. It is almost certainly true that if tax rates on tobacco and alcohol were the same in Italy, Britain and Sweden, it would cut down the amount of smuggling.

But the cost of tax harmonisation may be greater. It would reduce one of the only forms of governmental competition amongst the EU states. As Roland Vaubel, Professor of Economics at Mannheim University, explains: 'harmonised taxes are higher taxes'. Most European politicians argue against tax competition because if the Government of a 'single country thinks about raising taxes it must be afraid of losing taxable resources to other countries. If all European governments agree to raise taxes, taxpayers cannot escape' (Vaubel, 1998). Tax harmonisation would also, perversely, wed the EU governments more closely to products they disapprove of, as initially tax revenues would rise. Furthermore, sin tax harmonisation in EU would have bad long-run effects. It would encourage smuggling from non-EU states, potentially leading to a real customs-led 'Fortress Europe' to fend off the smugglers, and it would harden the resolve and power of the international gangs, who tend to be the most violent.

Another significant effect of higher harmonised tax is that it encourages counterfeiting. Intra-EU smuggling of high quality products becomes harder with tax harmonisation, but the incentive for passing off inferior products as genuine increases because of the massive differentials between the cost of producing copies and the retail price (which may be 85% tax) of the genuine article. For illegal drugs counterfeit products can be fatal.

The amount of illegality is astonishing. Just one example for speed.

A quarter of the cigarettes packets swept up after a football match in Liverpool, were smuggled. Further analysis showed that many of the packs were counterfeit 'Marlboro' produced at a factory in the former Soviet State of Georgia.

But these arguments are purely economic. While tax and business losses reflect an overt part of the destructive impact of smuggling, a less obvious but insidious effect is the societal harm caused by the resulting increase in organised crime. And it was these impacts that started to persuade the media that the anti high-tax arguments had merit.

In Sweden, for example, in addition to the legitimate manufacturers and illegitimate suppliers of cigarettes, there are 12 black market wholesalers, 300 retailers, and 10,000 major consumers. Many people seem to be drawn into the illegal markets in order to compete with organised crime, becoming criminals themselves. This is a constant feature of all mature black markets. Legitimate businesses see their prices undercut by cheaper contraband products. Sales plummet and some simply cannot compete and are forced out of business. Faced with huge losses or even bankruptcy, some honest business people feel forced into the black market, and are often coerced into handling contraband. They don't want to, but feel they must protect their businesses. But once they act illegally there is no turning back.

It should be remembered that the cause of these effects is the desire of greedy governmental officials to raise massive revenue for their activities. Therefore, smugglers are often liked, even revered, by consumers. Nevertheless, their activities are criminal, even if admirable in a Robin Hood way.

'The warnings that smugglers and criminal gangs would flourish because of the high price of cigarettes and alcohol have come true. … Together with the massive and incredibly profitable cigarette and alcohol smuggling, increasing quantities of narcotics are coming into Sweden, usually via the Baltic route (Västra Nyland, 1998)'.

The International Association for the Study of Organised Crime (IASOC, 1998), said that these crimes were: 'believed to be part of an ongoing battle between organised crime factions operating in Stockholm for control of the large trade of smuggled cigarettes.' Even in France, which has not reported a substantial smuggling problem, the effects of contraband smuggling are seen. On average, there is one assault on a tobacconist every day, generally when a shop is opening or closing, or when money is being transferred. The Confederation of Tobacconists reports that in four years, 12 tobacconists have been killed.

Corrupting individuals

Individuals become corrupted by the incentives to avoid high taxation. Criminals win when society's leaders succumb to corruption, which results in harm for the respect for the rule of law. For example, the average smoker or drinker is often persuaded to break the law by smugglers offering him cheap goods (often in the pub). Individuals offered bargain deals in such circumstances know the game and don't ask questions as to sources, especially given that they feel that 'they pay too much tax anyway'.

Organised criminals look for weakness in police and politicians—family problems, hidden affairs, financial difficulties—and use threats or bribery to bring people to do their bidding. The financial costs of trying to prevent this, and of prosecuting cases of corruption, are enormous. The wider societal costs are incalculable. In the end smuggling becomes inevitable and the respectable way of life is replaced by something more sinister.

Government officials benefit from the tax revenue generated from these products, but simultaneously lecture the young against use. One of the activists' slogans at the 1999 Seattle World Trade Organisation meeting was 'People Before Profits'. Governments may enjoy the double dividend they reap from taxing tobacco and alcohol, since it raises revenue and reduces demand, yet to others it appears as though they are benefiting from peoples' addiction. It is hard to criticise those who expose the moral ambivalence of Government policy. Whatever the exact cause of youth rebellion, the result is the worst nightmare for parents. Your son or daughter goes and buys drugs/drink/cigarettes, at exorbitant prices, which may harm or kill them, from people you would never let into your house, and they do so because it's naughty or dangerous.

The obvious recommendation is for governments with high tax rates on 'sin' products to reduce taxation rates on legal products, and decriminalise illegal products where demand is robust, since this would alleviate the significant problems (explained above) of smuggling. Of course, this recommendation is unlikely to be followed in the short run, because tax rates have been increased, so that government officials can appear tough on these nasty products that lead to illness, as well as raise revenue for their expenditure plans—the so-called 'double dividend'. In the long run, politicians will notice the growing public hostility to their ineffectual and ethically-dubious policies. New constituencies may develop to which courageous politicians can appeal and overturn policy. In the medium term economic considerations may make politicians act to reduce taxation—the only sure way to reduce smuggling and counterfeit products.

For example, the Canadian and Swedish Governments were bold enough to bite the bullet and reduce tax. Sweden cut its tobacco tax by 27% in 1998, and is benefiting today from lower smuggling, and probably lower teenage smoking (especially of previously unrecorded bootlegged products), even if official figures of teenage consumption are increasing.

Harmonisation of taxes at a high level may alleviate some forms of smuggling, but the incentive for counterfeiting is increased the higher the aggregate level of tax. Furthermore, even if harmonisation of tax levels across the EU were achievable, harmonisation for the countries and regions, from which the main counterfeit and smuggled products come (such as China, India, Eastern Europe, former Soviet States and Africa) will be impossible.

Addressing smuggling by increasing penalties on smugglers (such as taking private property from alleged criminals) has proven a failure. It deters the 'jack the lad' smuggler, but the void he leaves is filled by the toughest criminals, with drug traders prepared to fight whenever cornered (rather than risk arrest). Spending more money on customs and excise will reduce smuggling, but not significantly over time. Each new method will be overcome by the smugglers. More officials, x-ray machines, and other technologies look good but have little impact on incentives. New discoveries of smuggled products may be lauded as successes, but they demonstrate failure by being only the tip of an enlarging iceberg. Unless we wish to move toward de facto prohibition, tax rates on alcohol and tobacco products should be reduced to lower, more economically optimal levels.

Those types of arguments, especially those about individual corruption caused by high tax, led the media to a much better understanding of the problem in Europe than did simply economic arguments. And we need to think more creatively for explaining our other tax and regulatory problems. Our opponents do. 10% of the EU budget goes to NGOs, and they spend a significant amount of that money making the moral case against low tax, and low regualtion.

OECD and TAX

We are all involved in a fight against the 'OPEC for Treasurers'. As I have outlined from turtles to DDT to excise duties on cigarettes, harmonisation of excise taxes, environmental regulations and health regulations is being pushed by European agencies and it is undermining sovereignty, and hence undermining jurisdictional competition.

Excess regulations probably cost even more than high taxes but it's the tax harmonisation that can lead to an even greater loss of sovereignty. And that is where the position taken by the US (and its allies) is so important. No other nation can deliver the bloody nose that EU officials so badly need.

The French Trinity of Pascal Lamy, Lionel Jospin – both socialists – and Jacques Chirac, are all on record wanting tax harmonisation, all wanting UK taxes to move in the French direction. The German duo of Gerhard Schroeder and Joschka Fischer want the same thing – and especially Qualified Majority Voting on tax matters).

Outside the EU these actors are imperialistic in targeting small jurisdictions on tax, and hypocritical in not applying the same rules in their own countries. And I think its tempting, and tactically shrewd in the short run, for small countries to say they will agree to the OECD demands for information exchange if everyone else does the same. They know that some countries will never agree and rely on their honest robustness.

But in the long run this approach, adopted by Cayman, will come back to bite you. If you believe something is immoral its better to stand up against it. The reporting requirements being asked of banks today are crazy and should be fought. Cayman needs to make these an emotive issue, it needs to find the people harmed by tax harmonisation efforts and help get them in front of cameras. We must put the HARM back into HARMonisation.

Conclusion

So far the EU has failed on tax and informational exchange, largely because people see their loss of revenues due to tax and oppose it. But the stories about the unfairness of OECD demands, and the harms from uncritical informational exchange, as demanded by the EU Savings Tax Directive, must be better told. It is vital that the stories of Argentines whose savings have been confiscated by their government, Venezuelan businessmen whose families have been kidnapped by people sold information by the police and even French farmers whose taxes are too high are told. All these people deserve secure financial privacy if they invest in Cayman.

If we want to win, and win we must, we must win the media battle - and that will be by explaining the importance of financial privacy for the oppressed and jurisdictional competition for the aspiring nations. In particular the poor need the advantages that differentiated economies provide.

I therefore suggest to you that its vital the US (and for that matter Cayman, Luxembourg etc.) stand up for low taxes and limited regulations, because you show that those nations (from Angola to Zambia) can do the same.

Thank you for inviting me here today. Cayman business leaders I salute your strength in fighting the tendencies of former colonial powers- don't give up. 

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