Opportunities for International Financial Centres
in the 21st Century


A Lecture by Mason Gaffney, 16 July 1999, at a Seminar on
"The Fundamentals of International Legal Business Practice,"
sponsored by The Bahamas Bar Association and the Organization of
Commonwealth Caribbean Bar Associations.

     Super Clubs Breezes, Cable Beach, Nassau, The Bahamas.

     I am concerned, and I surmise you are, that the OECD is
campaigning to tax mobile capital wherever it may seek shelter.
It tells us that international tax competitition is "harmful,"
and should be stamped out.  Is this just ceremonial, like so much
politics?  I fear not.  It is more like a "smart bomb," with your
name on it.  When a powerful international political organization
officially brands you as "harmful," look out.  "The arts of Power
and its minions are the same in all countries and in all ages.
It marks its victim; denounces it; and excites the public odium
and the public hatred, to conceal its own abuses and
encroachments." -- Henry Clay, U.S. Senate, 14 March 1834.

     One of those "arts" is slander.  Some Administrators become
all too handy at violating the Ninth Commandment, "Thou shalt not
bear false witness against thy neighbor," a sin so damaging to
the social fabric that Moses ranked it right up there with the
Sixth, "Thou shalt not murder."  Defamation anticipates
oppression, conditioning suggestible minds to accept it. 

     The OECD tentacles extend deep into the scholarly world, and
get quick action.  The National Tax Journal, a sedate scholarly
outlet that should be detached from political pressures, picked
up the theme instantly.  Joann Weiner of the U.S. Treasury's
Office of Tax Analysis (OTA), and Hugh Ault of the OECD itself,
and the Boston College Law School, rushed into print in the
September, 1998, issue in a slavish rehash and endorlsement of
the OECD report.  The journal review process is ordinarily so
glacial that you could discover the meaning of life and take 5
years to get published, but Weiner and Ault picked up a Report
published April 27, pondered, consulted, wrote their manuscript,
had it "peer-reviewed" with breathtaking speed and jumped a long
queue: the Journal published it in September, four months after
the OECD Report itself.

     More recently, the same Journal published two articles, one
of unprecedented length (37 pages), on international tax
competition.  These are more in the literature-reviewing,
hemming-and-hawing style, but John D. Wilson, the major author,
concludes: "This assessment suggests a role for intervention by a
central authority ... " - a strong avowal for an academic more
disposed to issue caveats than to affirm.

     There are quite a few academics who, like myself, do not
agree that what you do is "harmful" to the world.  We do not
teach our students you are sneaky free riders.  (We may not think
you are plaster saints, either, but that is another topic for
another day, and we're not perfect, either.)


I.  Precedents

     So the OECD tells us international tax competition is
"harmful."  You may find their own words in the Report of their
Committee on Fiscal Affairs, Harmful Tax Competition, an Emerging
Global Issue, which the OECD Council approved on April 9, 1998,
and issued soon thereafter as a "Recommendation to the
Governments of Member Countries."  Anyone who can stay awake
through its deadly prose will recognize a very live assault on
your profession, and an uncritical embrace of personal income
taxation at high rates, imposed worldwide.  You may find a
readable summary in my response of August, 1998, "International
Tax Competition: Harmful or Beneficial?"

     The OECD ideal is tax "uniformity" among nations.  This has
a familiar ring to any economist who follows fashions in the
ideologies of public finance.  As one precedent, closely
analogous, in 1969 or so, California pundits told us that
interurban tax competition was harmful, because it kept some
cities from raising their sales taxes.  To solve this problem,
they invoked the doctrine of "uniformity": if only every city
raised the sales tax, no retailer or buyer could escape it by
fleeing to a city without one.  Accordingly, policymakers forced
every city to impose a sales tax, piggybacking on the existing
state sales tax.  The State collects it, and returns it to each
municipality of origin.  A few years later California cut its
local property tax rates to 1/3 of their former level, and
virtually froze assessed values (the tax base).  It replaced the
funds with state subventions, financed by raising state sales and
income taxes, taxes on upward mobility, and subjecting its once-
independent cities, counties and schools to a high degree of
state control.

     A "uniform" sales tax is NOT uniform in its effects.
Retailers in rich locations can bear it and survive; those in
marginal locations cannot.  It drives a tax wedge between buyers
and sellers, which only the rich locations have the cushion to
absorb.  The result is especially to penalize poorer
neighborhoods and regions and communities.

     There are unintended consequences.  Interurban competition
survives, but takes the new form of competing to attract retail
trade (and hence sales tax revenues) by overzoning for it, and by
subsidizing new retail outlets in various ways.  Those best able
to subsidize retailers are the cities already richer, adding to
the bias against marginal locations.

     A byproduct of that is a retail vacancy rate approaching
33%, an enormous private and social cost.  Every empty store
entails a wasted lot underneath it, and vast unused parking
spaces around it, in a ratio of about 5 s.f. of parking to one
s.f. of floor space.


II.  Internal Contradictions of the OECD

     Such centralized control is also the aim of the OECD
campaign against tax competition.  It is contradictory for those
who preach for competition in the private sector -- what they
call "liberalization" -- to call for suppressing competition
among governments, but that is what they are doing, in
increasingly strident terms, as quoted below.

     It is also incongruous for the OECD to fault tax havens for
"distorting" world investment patterns when their own internal
systems distort investment on a grand scale.  For example, their
Report (p.31) brands a nation as "harmful" if it lets a person
deduct costs when the corresponding income is not taxed.  That
sounds reasonable, and yet that is the standard treatment of much
real estate income in the U.S.A., the largest member of the OECD.
The costs of ownership - interest and property taxes - are fully
deductible.  The cash flow is offset by overdepreciation until
the property may be sold.  The resulting nominal gain then gets
special treatment as a "capital gain," often resulting in no tax
at all, and at most in a lower tax rate, at a deferred date.  If
it is an owner-occupied residence with curtilage and pleasance,
or a private pleasure-ground, however vastly spreading and
preemptive, there is not even a nominal tax on the imputed
income.  A large share of the land in affluent nations today is
in modern country manors, whose popularity rises in step with the
value of their freedom from income taxation, i.e. the tax rate on
cash income.

     Thus, OECD members might review Scripture: "First pick the
beam from thine own eye; then thou may see better to pick the
mote from thy neighbor's eye."


III.  What is "harmful"?

     The OECD says a "harmful tax regime" is one that "attracts
mobile activities."  Many of us see that, rather, as a mark of a
good system, but I'll return to that.  First, let's follow them
along a way.  Right away we think of low taxes, and that is what
the OECD means - on p.27 they specify low income taxes.  They,
and allied international organizations like the EU, also have a
history of jumping nations whose VAT is too low to suit them. 

     That view is too simple by far.  Mexico, for example, has
very low taxes, but repels both capital and labor anyway.  A
nation may also attract mobile activities and factors in two
other ways.  One is by offering superior public services.  That,
for example, is how many of us became Californians, lured by the
State University.  The other is by a tax structure that favors
mobile activities without stinting on public services.  This may
be done simply by targeting taxes on IMmobile resources.  Let's
inspect those points closer.

     A.  Richness of the tax base

          A jurisdiction may enjoy both high public revenues and
low tax rates if it be favored with a high tax base.  Alfred
Marshall, renowned Edwardian economist, warned about the
excessive magnetism of London, and, within Greater London, of the
richer suburbs.  Vancouver, B.C. is another  example of
Marshall's principle.  It is such a magnet for Canadians that the
Provincial Government deliberately fosters developments elsewhere
in the Province at the expense of Vancouver.  The whole Province
of Alberta is another such magnet, thanks to its monopoly of
petroleum in Canada, and its effective system of raising
Provincial revenues therefrom.  The State of Alaska is another
magnet.  It has the highest taxes per capita of any U.S. state,
but they are paid mainly by a handful of giant oil companies with
favorable leases on State-owned lands.  Its magnet takes the very
direct form of an annual "social dividend" of over $1,000 per
man, woman and child, in cash.  More generally, though, the whole
world is divided among tax jurisdictions with richer and leaner
tax bases, ranging along a wide continuum.

     In all those cases, the "distortion" caused by high public
revenues is in attracting mobile factors, not repelling them.  It
is an advantage enjoyed by the major OECD nations, vis-a-vis
those less favored by nature, by virtue of their occupying the
best locationss on the planet.  It seems rather shabby of them to
deny nations with poorer lands the best recourse available.  If
anything, the situation calls for helping the poorer nations.

     Poorer nations may replicate the magnetism given by natural
advantages, and attract mobile activities, in two ways.  One is
by maintaining a more efficient and honest government: more
service at lower cost.  This is what competition is supposed to
achieve in the private sector: why not in the public, too? 

     The other way is by adopting a magnetic tax structure.
There are taxes and then there are taxes.  The OECD Report was
written by people wearing blinders that keep their eyes and minds
glued only on kinds of taxes that penalize and repel mobile
activities.  Let us liberate ourselves from that fixation.  There
are taxes that do not repel mobile factors, but positively
attract them.  Now that is Tax Competition!  The OECD ignores it,
and apparently bids us ignore it, too, for it will embarrass
nations with repressive and repellent tax structures.  I will
give you some examples.


     B.  Magnetic tax structures

          The U.S.A. is a great laboratory for testing tax
structures.  It contains 51 or more separate systems, with free
migration of labor and capital guaranteed by The Constitution.

     The extraordinary growth of California from about 1900 to
1978 shook and recast the economy of the U.S.A., and parts of the
whole world.  It was not done with low taxes and skimpy public
services.  It was in part the product of a tax structure that was
Magnetic (compared with other states).  California's natural
advantages (a mixed bag) did not promote much growth after the
1849 Gold Rush and the Civil War, when California growth lagged
badly for 20 years or more.  Neither did the transcontinental
rail connection, completed in 1867, promote much growth.
Eventually, though, INTERNAL growth-oriented forces prevailed.
California provided superior public services of many kinds: water
supply, schools and free public universities, health services,
transportation, parks and recreation, and others.  It held down
utility rates by regulation, coupled with resisting the
temptation to overtax utilities.

     That all required tax revenues.  California had oil, but did
not tax severing it, and still doesn't.  Its wine industry went
virtually untaxed.  There was and is hardly any tax on its
magnificent redwood timber, either for cutting it or letting it
stand.  There was no charge for using falling water for power, or
withdrawing water to irrigate its deserts.  Most of those are
good ideas, but they are not what California did.

     Its main tax source was another kind of immobile resource:
ordinary real estate.  Its tax valuers focused their attention on
the most immobile part of that, the land, such that by 1918, land
value comprised 72% of the property tax base - and on top of that
there were special assessments on land.

     People and capital flooded in, for they are mobile in
response to opportunities.  California became the largest state,
and a major or the largest producer of many things, from farm
products up to the "tertiary" services of banking, finance and
insurance.


     C.  Was this tax competition "harmful"?

          On the contrary, in a world of self-aggrandizing
governments, intergovernmental competition is all that makes life
bearable.  Competition from nations or cities with rich tax bases
can distort the allocation of mobile factors, it is true, but
that is not what OECD is targeting.  Rather, they are targeting
the magnetic tax structures of governments that are efficient and
economical.

     If California competition were harmful to the world as a
whole, we would have to conclude by analogy that the discovery of
the New World was, too: Columbus should have stayed home.  The
Lucayo Indians whom he exterminated here would probably agree, I
must admit; so might the Aztecs and Incas whom the Spaniards
looted.  There was a negative side to the migration of European
and African people and capital to the New World, yet few would
suggest that many people, on balance, would be better off today
in a world shrunk to its eastern hemisphere.

     California became the largest producer of cotton, for
example, displacing a good deal of eastern cotton.  The damage to
eastern producers was offset by an equal gain to cotton
processors and consumers, with a net gain from higher usage due
to the lower price.  Eastern cotton lands were released for other
uses, like reforestation of lands marginal for cotton.  (To the
extent this was due to subsidies, and racing for cotton quotas
during the Korean War, I do not vaunt it - but there are few pure
examples of anything in this complex world.)

     California attracted eastern workers, tending to draw up
eastern wage rates.  The damage to eastern employers was offset
by an equal gain to their workers, with large net gains from two
sources.  One is a more equal distribution of wealth; the other
is a drop in welfare costs and social problems like crime that
would have ensued had the "Okies," for example, had to remain in
the Dust Bowl instead of finding new lives in California.  Even
the braceros, the Hispanic "guest-workers" who toil in the
fields, send money home, relieving problems in their homelands.
It would be better yet if they could become small landowners and
work their own farms, but in this imperfect world we observe what
is, without denying that it might and should be better.  What is
involved here, in spite of its well-publicized abuses, and
glaring shortfalls, is turning useless and even criminal people
into productive people. 

     As to capital, California offered a higher return on that,
too.  There emerged what people called "the continental tilt of
interest rates," higher in the west, to overcome the frictions of
space and draw eastern capital to where it was more welcome.
Over time, buildings that wore out in the east were replaced in
California.

     Did California's vigor seem too ambitious, so as to damage
others?  If so, as Shakespeare had Marc Antony say, "it were a
grievous fault," worthy of suppression by an OECD.  Most
economists believe, however, that investing is the motor that
drives prosperity, and raising investment opportunities is the
key to the ignition.  I certainly agree.  OECD does not,
apparently, for last July it pressured Spain, an emerging member,
to bring down its interest rates to the "euro convergence rate"
of 3.5%.  Apparently any nation pursuing "harmful tax policies"
to raise investment opportunities would upset some delicate
balance or grand plan.  May we not anticipate pressure on Ireland
to raise its corporate income-tax rate on manufacturers drawn
from elsewhere?  Will the new European Central Bank not demand
Irish cooperation in holding down continental interest rates?

     California competition did tend to pull up interest rates
back east, hurting some borrowers.  These losses, however, were
offset by equal gains to savers, with a net bonus from the rise
of saving caused by higher interest rates.  There are those who
would intuitively assume that the distributive effects are
regressive, but that is doubtful.  In this case the truth is
counter-intuitive.  Equity earnings in stocks and real estate
vary inversely with interest rates.  Equity values are impacted
even more, because higher interest rates translate into higher
capitalization rates, which mean lower Price/earnings (P/e)
ratios and lower capital gains. 

     This is too big an issue to settle in a few words.  If you
find it counterintuitive, I can only ask you to think about my
argument above.  On balance, in my opinion, a rise of interest
rates has an equalizing effect on the distribution of wealth, and
the moreso when the initiating cause is a rise of investment
outlets.

     The net "micro" or allocative effect of higher interest
rates is to move capital into higher uses, as directors impose
higher "hurdle" rates on their managers.  (A "hurdle" rate is a
minimum acceptable rate-of-return on any prospective investment.)
Hurdle rates rose, not because there was less capital overall,
but more opportunities to invest it productively.

     Basically, California's remarkable 20th Century growth
extended the American and the Canadian tradition of the western
frontier, in the spirit of Thomas Jefferson, as a "safety-valve"
for mobile resources oppressed in the older states.  It limited
the power of the haves over the have-nots, with net gains all
around.

     Was California growth the product of untaxing wealth, and
dumping taxes on poor workers and consumers?  The OECD says
competition is harmful because it limits the power of OECD
nations to tax "wealth," thus more-than-intimating that they are
upholding the interests of labor, like good continental European
social democrats.  In this, I suggest they have misstated the
issue, setting an agenda for a false and futile debate, fooling
both their friends and their critics, and possibly even
themselves (although I am cynical as to the last point).  Their
premise, at least the one they state, is that "wealth" is more
mobile than labor.  Some wealth is, of course, but California
relied on the property tax, and, to repeat, 70% of this tax base
was land, pure land, totally immobile.  The OECD treats land like
one of those four-letter words that is unmentionable.  So do its
academic retainers, who are well-trained to believe that land is
just as mobile as capital.  This makes them completely useless to
analyze the OECD allegation that a nation's tax regime is
"harmful" if it attracts mobile resources.

     Was California growth the product of southwestern pioneer
vigor?  Compare if with New Mexico, not far away.  New Mexico has
made itself little more than a Third World Nation masquerading as
an American state.  Since before statehood, an oligarchy of giant
landowners, in the million-acre class, have dominated everything,
and kept taxes off their vast lands.  New Mexico raises a lower
fraction of its state and local revenues from the property tax
than any other state.  Its economic base, such as it is, is
mainly the product of what Senator Albert Beveridge of Indiana
called "the free coinage of western Senators."  New Mexico gets
more federal spending per capita than almost any state, but that
and scenery are about it.  It is picturesque: its boosters call
it "The Land of Enchantment," but The Enchanter has cast a
sleeping spell on its local enterprise.  It has the highest
poverty rate in the U.S., and, in its wide open spaces, nearly
the highest rate of violent death in the U.S. - itself a violent
nation.


     D.  Recent changes.

          In 1978, California took a giant step backwards by
enacting its "Proposition 13," capping property tax rates at
about 1/3 of their previous level.  The national ranking of its
services began a precipitous fall; so did its per capita income.
Struggling to maintain itself, the State has raised sales and
income and business taxes to unprecedented levels.  These are
taxes that "shoot anything that moves," and spare immobile
resources that don't.  The result has been the rapid
"Alabamization" of California, as we have fallen to join Alabama
with the worst school system in the nation.  Inmigration has
changed to outmigration, and of those who stay, California has by
far the largest prison population of any state, so large that the
union of prison guards is now our most powerful lobby, and
building prisons is our fastest-growing construction industry.
None of these people, prisoners or prison-builders or guards, are
producing goods and services for others, but are not counted as
unemployed, and our unemployment rate is above the national
average even without them.

     Today if we look for a new frontier we find it in, of all
places, one of the original 13 colonies, New Hampshire, with its
poor soils, marshy peneplains, harsh climate, impassable
mountains, and lack of natural urban confluences.  What New
Hampshire has now is the least repellent tax structure in the
nation: it does not tax personal income or sales, while 2/3 of
all its state and local revenues come from the property tax. It
has bucked the national trend toward taxing income and sales, and
IT HAS PROSPERED!  (Details are in a Chapter by Richard Noyes and
the speaker in Fred Harrison (ed.), 1998, The Losses of Nations.)


IV.  Is Tax Competition Beneficial?

     A more efficient government would offer superior public
services without higher taxes; or the same services with lower
taxes.  Is this harmful?  Those who sanction competition to
regulate private enterprise to attract suppliers and customers,
and undercut monopolies, should by the same reasoning also
endorse competition among governments to attract people and
capital.  Such competition is a major defense against the tyranny
that a monopoly government can exercise.

     Every government has some latent monopoly power by its
nature - a monopoly of power over certain lands.  The behavior of
OPEC during the 1970s, and the threat posed by Saddam Hussein
more recently, illustrate the point, but by no means exhaust it.
Governments try especially to attract industries that are clean,
safe, and generative of fiscal surpluses.  That includes tertiary
industries like yours, of course.  Through the OECD, they will
fight to keep them from migrating elsewhere.  As Baroness
Elizabeth Symons of Vernham Dean, Minister for the Overseas
Territories, remarked recently, London itself is the largest
"offshore" financial center.

     The benefits of intergovernmental competition are
exemplified by an era in European history.  The 16th Century, the
age of nation-building, also saw a worsening in the returns to
the mobile factor, labor.  Before that, during the anarchic Wars
of the Roses in England, for example, dozens of petty tyrants
competed to hold onto their retainers and archers, making the
14th and 15th Centuries a golden age for English labor.
Competition tempers Tyranny.  Economic historians have shown that
the material living standards of labor in this golden age were
higher than in the 19th Century, for all its technical progress.
(The Church used its vast landholdings to provide the welfare
system of the period.)  The Tudor monarchs then put an end to
such wasteful competition among tyrants.  They let their
favorites enclose the commons, and replace people with sheep.
They let thousands be cast loose to roam as "sturdy beggars," and
then whipped them back, landless and desperate, to serve on the
masters' terms.  Thus was the modern age born in agony, an agony
brought on by ending competition among governments.


V.  Should tax regimes be the same everywhere?

     Uniform taxation does not produce uniform results, a
phenomenon that tax-economists acknowledge in their theorizing as
"The Ramsey Rule."  Having nodded to it in theory, many of them
then pass over it in prescribing actual tax policy - a maddening
ambivalence that I will not try to explain here, but only
deplore.  They would improve their policy prescriptions if they
gave more weight to the Ramsey Rule.  In some disfavored regions,
or "lean territory," at the edges of settlement, the land
generates little or no surplus above the opportunity cost of the
mobile factors.  Labor just makes wages; capital just makes
enough to pay interest.  Impose a uniform GST, PAYE or VAT and it
makes economic life non-viable at these lean edges, because there
is no taxable surplus there: you can't squeeze blood out of a
stone or a turnip.  The giants of classical political economy
(Smith, Ricardo, or Mill) saw this clearly; so had their mentors,
the French Physiocrats like Quesnay and Turgot.  Thomas
Jefferson, a student of the Physiocrats, also saw it clearly,
which is why he opposed the excise taxes favored by Hamilton,
which bore heaviest on the frontiersmen whom Jefferson
represented so well.  His brilliant Treasury Secretary, Albert
Gallatin, was a French-Swiss immigrant who also knew his
Physiocracy well.

     A modern example is "the Backveld" of South Africa.  South
Africa imposed a VAT with the very purpose of extracting taxes
from poor blacks in the Backveld.  The result was to sterilize
the Backveld economically, to scorch the earth and drive its
people away to squat in extra-legal shacktowns like Soweto, near
Johannesburg, and The Crossroads near Cape Town.  It forced them
to survive by hawking in gray markets on the streets and
roadsides, turning also to drugs, prostitution, and crime.  What
else were they to do?

     A rich place like, say, Vancouver might impose a VAT and
survive, but it is not clear that it should, even so.  Hong Kong
is the sparkling paragon of a rich territory that embraced
magnetic tax policies.  As a Crown colony, it redoubled its
natural magnetism by shunning repellent taxes of most kinds.  Its
public coffers overflowed, nonetheless, because the Crown owned
all the land there, and did a tolerable job - not excellent, but
better-than-average - of collecting much of the rent for public
purposes.  With a tiny land area, about 5% of The Bahamas, it
became a world center of both secondary and tertiary industry,
with a population of 5 millions, and a high per capita income by
world standards.  Those who have eyes to see, let them see.

     National governments not owning their own land can replicate
the Hong Kong effect simply by emulating California of yesterday,
and New Hampshire of today, basing most of their taxes on the
immobile factor, land.  Tax capital, and capital flight is a
hazard, but land never flies nor flees.  Tax labor, and brain-
drains are a menace, but land stays home.



VI.  Choices for the OECD nations

     If the OECD nations are concerned about tax competition,
they have at least three choices.

     A.  They could impose exchange controls to prevent capital
export, as attempted by various authoritarian states before world
war II, and some welfare states afterwards.  This approach had
its day, and is now a proven failure, although that is not
stopping some desperate failing Asian nations now from giving it
another whirl.

     B.  They can try muscling small nations into copying, and
helping them enforce, their own repressive tax systems.  This
means and requires extending their sovereignty worldwide, as
envisioned in the OECD Report we are discussing.  It is in the
spirit of the times, in this age of world cartels, MNCs, the
International Telecommunications Union, world radio and TV
networks, the IMF, the World Bank, the WTO, the MAI (another OECD
boon), the Trilateral Commission, Interpol, the world war on
drugs, the U.S. as world policeman, etc.  It is something like
the Holy Alliance that undertook to police each aberrant nation
of post-Napoleonic Europe, only more ambitious: its turf is the
whole world, with no exceptions or refuges, not even any speck of
coral in the wide oceans.  Any independent force threatens the
whole structure, so it demands nothing short of worldwide
domination: a megalomaniac goal, indeed. 

     The megalomaniac mindset is seen in a recent statement from
Italian Treasury Minister Carlo Ciampi that the IMF's interim
committee must become "the embryo" of an economic government for
the world, backing recent calls by Michel Camdessus for the
interim council to become a body producing binding directives
rather than recommendations (ROME, Dec 17 (AFP)).  Baroness
Elizabeth Symons of Vernham Dean, Minister for the Overseas
Territories, makes it even plainer when she tells us that the new
OECD guidelines are intended not just for members and their
territories, but "non-members as well.  It is, therefore, an
ambitious attempt to create a new international standard to apply
equally to all jurisdictions." (Address to the British Virgin
Islands Financial Services Seminar, September 1998.)  Bahamians,
take note: did I say this is a smart bomb with your name on it?

     In the short run The Bahamas seem positioned to benefit by
your independence.  The Edwards Report of the British Treasury,
quickly endorsed by Robin Cook's White Paper, declares an intent
to pressure the Dependent and Overseas Territories into following
the UK along the OECD lines.  Cook is also cajoling, holding out
the bait of non-reciprocal UK citizenship for citizens of islands
that comply.  (One wonders if he would do this if Hong Kong and
the Bahamas were still British?)  Those territories are bending
over backwards to appear cooperative and compliant.  This would
seem to open opportunities for The Bahamas to pick up new
business.  This honeymoon, however, should it occur, would likely
lead to new OECD pressures on The Bahamas.

     C.  They could reform their own domestic tax systems along
the lines demonstrated by California before 1978, by Hong Kong
before 1997, and by New Hampshire today.  They could lead us to a
world of benign tax competition.  They could move away from
extra-territorial taxation to purely intra-territorial taxation;
away from in personam taxes towards in rem taxes; and away from a
mobile tax base towards a more immobile tax base.  They are not
headed in those directions today, but if one or two nations can
face them down, they will have no other choice.  Freedom anywhere
foils tyranny everywhere.  Tax tyranny is a balloon: seal every
leak, or it collapses.


VII.  Tax intelligence

     A cognate concern of the OECD is extending the sovereign
powers of its members to pry into private dealings in other
nations.  The French verb percevoir has two meanings: one, of
course, is "to perceive"; the other is "to tax."  How very
perceptive of the French to notice that connection.  To tax some
thing or event you must first conceive it and see it.  Income-tax
agents are necessarily voyeurs.  They are frustrated and offended
by privacy provisions in other nations and, as the OECD Report
makes clear, they believe they have the moral authority to pierce
those veils, and to invoke political force for the purpose.

     Must it be so?  Is taxation always at war with personal
privacy and national sovereignty?  Fortunately, no.  The OECD
Report tacitly premises that all taxes must be on a personal (or
corporate) basis: what the lawyers call in personam.  Some other
taxes, however, are levied on a thing, or in rem.  Import duties,
for example, are levied on bringing in dutiable goods, regardless
of who does it, or where they come from (although sometimes this
is considered).  No deep inquisition is required into all the
personal affairs of the importer.  Duties are enforceable simply
by refusing admission until they are paid or, in extreme cases,
seizing the goods.  Only in criminal cases are persons as such
penalized or jailed.

     There are upper limits on feasible tariff rates.  Many
national borders are long and penetrable.  Many nations are
lowering or avoiding import duties in the interests of freer
world trade, the strong trend of the times.  Many groups rebel
against high domestic consumer prices.  The weight of opinion is
that import duties, and all such consumer taxes, are regressive,
and socially undesirable.

     A purer case of in rem taxation is the tax on real estate.
Such taxes are a lien on the land, not the owner.  Sovereignty
over land is unambiguous.  Each parcel of land is either inside
or outside the taxing jurisdiction, regardless of who owns it, or
where he or she resides, or what other assets he or she may own,
or other income he or she may receive, here or elsewhere.  No
international tax treaties are needed in order for a nation or
smaller jurisdiction to tax its own land.  No information need be
demanded of any other nation or its institutions, as a rule.  The
important exception is a severance tax on minerals exported by
MNCs that use internal pricing to transfer profits to low-tax
jurisdictions - a case calling for drastic remedies on the home
front.

     Adam Smith wrote in 1776 that if you tax stock (movable
capital) it will be concealed or removed.  Worse, some forms of
capital are more concealable and removable than others, so a tax
on capital, even on ALL capital, is necessarily nonuniform.
Knowing the quantity of mobile capital requires a deep
inquisition "as no people could support" (Wealth of Nations, p.
800).  Capital is never uniformly taxed, and never can be, even
within one nation.  In today's world economy, with instant
electronic encrypted international fund transfers, the ability of
creative people to avoid and evade taxes on mobile capital has
outrun even Smith's pioneering insights.

     The OECD's response is to call for more enforcement, and to
scapegoat small tax havens.  To enforce an income tax today calls
for nothing less than a worldwide intelligence network with vast
powers of search and seizure. 

     It also calls for worldwide thought-control to give it moral
authority and general support.  The end of this thought-control
is to criminalize income.  Since that is too absurd to proclaim
in so many words, the OECD nations have added a step: it is not
criminal to earn income, but it is criminal to do so and not
"admit" it and pay a fine.  People's minds have been conditioned
to tar that as "cheating," as though it were a kind of moral
lapse.  It is roughly parallel (without judging the case) with
Kenneth Starr's approach to President Clinton: what you did was
neither criminal, nor public business; but failing to report it
was both, and impeachable.  The OECD Report is the latest move in
a longtime thought-control campaign to universalize that attitude
toward earning income.  One earns income mainly by producing
goods and services, so that mindset is stiflingly, massively
counterproductive.  More: to impose a false, self-serving
"morality" is the worst kind of immorality.

     We have come a long way since Adam Smith gave people credit
for not supporting deep inquisitions into their affairs.  How he
would boggle at the inquisitions "supported" or tolerated today.
However, now it has become clear that income taxation cannot
endure without a worldwide intelligence network: a worldwide
inquisition by the revenue agents of every nation into the
records of every other nation.  Here, I submit, is where to draw
the line.  Here is where a determined small community, jealous
and precious of its sovereignty, can defy, puncture and collapse
a bloated world tyranny.  It's been done before.

     Messrs. Gibson and Bastian, speaking at this conference,
indicate a determination to uphold Bahamian independence.  I wish
them, and you, the best of luck in doing so.  Don't let anyone
make you feel guilty: tax competition is not harmful, but benign.
You will be doing not just yourselves, but the whole world, a
good turn.


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