Tag Archives: Economic Development

A Brief History of Tax Havens

                                                                                                       Above: CCP Inc.

For as long as there have been unscrupulous governments levying taxes, there have been savvy people finding ways to avoid paying them. The emergence and continued existence of tax havens in direct defiance of onerous and unjust taxes continues to serve as a catalyst for economic as well as political, social, and ethical reform. It can be said that tax havens and, for that matter, any sort of “enclave of freedom” provide the only true competition to the conventional model of government. Such entities promote human progress and are a source of social innovation.

Ancient World                                                                                                                                                                                                                                               Above: Athenian Acropolis

It is a documented historical fact that the government of Ancient Athens imposed a 2% ad valorem duty tax at the city-state’s principal port. Athens was far from the only ancient polity that engaged in such taxation of trade; other city-states engaged in the practice include Halicarnassus, Cyprarissiae, Delos, Epidaurus, and Troezen. Governments even began experimenting with and implementing protective measures. The princes who ruled over Bosporus even levied a 3 .33% export tariff on all corn produced in the kingdom, unless the produce was destined for Athens, in which case the rate was reduced to 1.66%.                                    Then as now, certain statesmen and people responded to the authoritarian imposition of such measures on them and other average citizens. In Athens’ case, small nearby islands “offshore” from the Peloponnese, became the preferred ports-of-entry for traders, looking to avoid the tax. Over time, even the Athenian bureaucracy responded to the force of market competition. Thucydides writes that in 413 B.C., Athens phased out its 5% import and export duty in tributary ports “because they believed in this way they would increase their revenue.”

Medieval & Modern World                                                                                                                                                                                                                         Above: City of London Corporation            

With the chaos wrought by the fall of the Roman Empire, sanctuary cities, providing individuals as well as organizations, asylum from a variety of different threats fostered a European tradition for increasing trade and political liberalization that would only be realized later. In analyzing the history of the tax havens an interesting trend appears; it seems that medieval and contemporary tax havens have their roots in the English Common Law tradition. Perhaps the star of the modern tax avoidance/protest movement is the 1.2 square miles governed by the City of London Corporation.                                                                                                                                This fascinating organization, shrouded in rite and a wealth of traditions including its Freedom of the City ceremony, traces its legacy of autonomy to its 12th century establishment as a commune and 1191 recognition by Prince John. The city was given special protections including the right to elect its own mayor in the 1215 Magna Carta. The City of London’s history has been joined at the hip with the development of livery companies. Descended from medieval guilds, livery companies today operate as trade associations for a wide variety of professions. Most livery companies carry the title “Worshipful Company of [profession or cause].”                          In addition to providing fodder for conspiracy theorists, the City of London’s 110 livery companies provide a great networking function within their respective professions, champion various philanthropic causes, enforce a professional code in their fields, award professional qualifications, etc. Of course, some of these functions vary according to the livery company, but overall the core functions remain the same. Importantly, the City of London enfranchises the business electorate. How this works, essentially, is that any incorporated or unincorporated business or organization whose premises are located within the city may appoint a number of voters based on the labor force they employ. In addition, the senior members of the liveries, the “liverymen”, sit on a council named the Council Hall, which chooses the Lord Mayor of the City, sheriffs, and other government positions.                                                                                                          As already mentioned, the city plays host to a large number of significant financial institutions including the Bank of England, London Stock Exchange, and Lloyd’s of London as well as offices of over 500 banks. In total, the City of London accounted for 2.4% of U.K GDP in 2009. There are some claims that the City of London effectively operates as a tax haven for foreign multinational companies, shielding businesses under investigation for fraud. Such accusations border on the realm of preposterous. What is clear, though, is that the City’s tradition of secrecy, autonomy, and sanctuary seem to have been picked up by crown dependencies the world over.                                                                                                                                                                                                                                                                                                                   Above: The South Sea Bubble : A Scene In Change Alley 1720

Founded in 1711, the South Sea company was a joint-stock company created as a way to consolidate and ultimately reduce the British government’s debt. Basically, the company’s business model was to attract investors who would pay off a government IOU in exchange for exclusive trading rights in the South Seas. The venture rested on the speculation that new markets for British goods would emerge in Latin America, opening up new silver and gold markets to the company and its private, British investors. Faster than you can say “Ponzi Scheme”, people were flocking to the South Seas Company, astronomically overvaluing the price of the stocks. The pioneering spirit embedded in the business plan of the company became a sensation. Soon, schemes promising to invest in everything from “floating mansions” to “sunlight reclamation from plants” sprouted up across Great Britain.                                                  When the leaders of the South Sea Company finally realized that the company’s stocks were vastly overpriced relative to the company’s actual earnings and value, they sold their own shares in the business. When news broke out of their sales, a mad frenzy of investors selling off their shares in the company ensued. The market would’ve completely crashed had it not been for the banking prowess of the British Empire.                                                                                                 Perhaps the most enduring legacy of the South Sea Bubble was not the lesson in investing (Can you spell, Bernie Madoff?) but the Bubble Act of 1720 which effectively forbade the formation of all join-stock companies not approved by the royal charter. Throughout the British Empire, new rules and restrictive regulations relating to business incorporation were enacted. Until the law’s repeal in 1835, rates of incorporation were considerably lower throughout British domains than they had been previously. In the late 19th century, the cash-strapped states of New Jersey and Delaware began reforming these laws and began attracting out-of-state businessmen, seeking to incorporate in these “havens”, in droves.

                                                                                           Above: Egyptian Delta Land & Investment Co.

The 1929 British court case Egyptian Delta Land and Investment Co. Ltd. vs. Todd  was a landmark development in the creation of modern-day tax havens. The dispute arose over the issue of taxation as related to a corporation’s location(s). The Egyptian Delta Land and Investment Company though legally incorporated in London, was headquartered in Cairo and operated in Egypt. Essentially, the court ruled that the company was exempted from paying British taxes because it did not operate in the UK. This case set the precedent for offshore business incorporation and the nervous governments that try to counteract it. Years later, various British and former British holdings exploited and tweaked this ruling in their own laws including the Bermuda, The Bahamas, and Cayman Islands. Bermuda, in particular, would prove to be an early pioneer of the modern tax-haven.

                          Above: Conyers Dill & Pearman

Bermuda traces its history as an offshore destination to, you guessed it, a bunch of lawyers, specifically, the law firm Conyers Dill & Pearman. In 1935, firm’s founder Reginald Conyers drafted Bermuda’s first  “exempt company” legislation, birthing what some consider the first modern tax shelter. The law’s language specifically addressed “exempt companies,” laying the foundations of the modern-day offshore business craze. Today, the firm works in various offshore financial centers such as the British Virgin Is., Cayman Is., and Mauritius.                                  Around the same time in Switzerland, the Federal Act on Banks and Savings Banks was enacted (1934), offered banks strong protections of privacy. Article 47 of the document (known colloquially as the Swiss Banking Act of 1934), enshrines the concept of absolute professional secrecy. In other words, any inquiry into any account held in Swiss banks is considered a criminal offense. The law restricted access to information about private holdings in Swiss banks to any government, including the Swiss. Exemptions can be made in the case of Swiss judge’s subpoena, or investigation of terrorist-related funds. In addition to the national legislation, the laws of numerous Swiss cantons were written to extend various business and financial protections to individuals and organizations.                                                                                                    Following on the heels of the First World War, Lichtenstein passed the Lichtenstein Persons and Companies Act in 1926. The law, along with subsequent laws in 1928, relaxed and streamlined Lichtenstein’s incorporation rules; made Lichtenstein the only continental European country to have a codified Trust Law; and extended privacy protections to foreign holdings in the country. The law also introduced a vast repertoire of incorporation types to the Lichtensteiner legal system. As a result, the mostly poor and agrarian economy that had been ruined by the First World War was transformed almost overnight into a modern economy, focused on financial services. The growth was precipitated by the vast influx of domiciliary and holding companies in the 20’s and 30’s. The 1926 law, combined with Lichtenstein’s maximum business tax rate of 20% and open border agreement with Switzerland, have made Lichtenstein an attractive and wealthy offshore center.                                                                                                        Following the 1950’s, the 20th century saw a huge proliferation in the number of tax havens worldwide including every type of municipality from Pacific island nations, to the Irish Financial Services Centre in the heart of Dublin, Ireland. In recent years, the OECD (Organization for Economic Co-operation & Development) which is anchored by representatives from high-tax developed nations, has been aggressive in their attacks on tax havens and offshore financial centers. Recently, the Swiss signed an OECD treaty ensuring the exchange of tax information in certain instances. This comes off the heels of prior Austrian and Luxembourgish concessions.

Looking Forward                                                                                                                                                                                                                                   Above: The Seasteading Institute

While there are many aspects of tax havens and their development that I have left out of this article (perhaps it will be fodder for a future post), I think the most interesting is the prospect offered by seasteading. Essentially, seasteading is a movement by a small but dedicated group of libertarians and anarchists committed to offering citizens of the world alternatives to traditional government. Essentially, a seastead is a site located in international waters, beyond the EEZ of existing land-based nations, on which people can dwell. The seasteads can be joined to one another and disconnected as needed. The concept is that people will form voluntary associations rather than have a governmental entity imposed upon them. The belief is that by subjecting social governance to the same competitive forces that power the market, human creativity will be unhindered, unleashing the beneficial powers of technology and social innovation.                                                                                                                                                               Currently, The Seasteading Institute is directing its recruiting efforts towards fulfilling what it calls The Eight Great Moral Imperatives: “Cure the Sick”, “Enrich the Poor”, “Feed the Hungry”, “Clean the Atmosphere”, “Live in Balance with Nature”, “The Velella Mariculture Research Project”, “Power the World”, and “Stop Fighting”. The group hopes to achieve all this by engaging the ingenuity of its supporters and the freedom offered by the absence of government to achieve technological breakthroughs that will better humankind. Does this sound like a crazy, utopian pipe dream? Maybe, but it sure is a noble pursuit.

In closing, I’ll leave you with the following thought. In order to create a more just and prosperous future and ensure the continuing of human flourishing, we as the human race must move towards a model of social organization that subjects these institutions to the forces of competition and creative destruction led by the choices of individual actors.

 

Infrastructure Projects with Major Geopolitical Implications

 Above: Map showing portions of the projects discussed in this article

 

Energy Triangle                                                                                                                                              Following the discovery of natural gas and oil reserves in the Exclusive Economic Zones (EEZs)  of The Republic of Cyprus and Israel, the two nations created a joint EEZ in 2010. Basically, the agreement allows the two countries to move freely and easily about the two zones and it obliges the two states to cooperate on resource exploitation initiatives that straddle the borders. It is hoped that within the next 3-5 years, some solution will be drafted and under construction, allowing traditionally resource-poor Israel and Cyprus to become oil exporters. Currently, the plans for a joint natural gas and oil project between the two nations are in the most basic of stages, facing some significant practical challenges.

However, the EuroAsia Interconnector Project is looking very feasible and may materialize soon. As shown in the above map, the plan calls for a linking of the electrical grids of Israel, Cyprus, Crete, and mainland Greece. If completed, it would be the longest subsea power cable and, as its name suggests, the first linking Asia and Europe. In the map provided, it should be noted that the cable routes would not follow the straight-line paths that I have marked out, but due to a lack of public information on any such routes, I demarcated straight line paths. The project heads have promised that once the project is begun, completion would occur within 36 months. Currently, it looks as though the proposed project could begin construction in 2016 or 2017.

Why It Matters                                                                                                                                         The project makes economic sense because Israel can supply electricity at cheaper costs to the Cypriots and Greeks and, upon completion of other connector projects, Greece can export electricity to Italy and other Balkan nations. The project makes geopolitical sense for all three nations because it effectively creates an axis of traditionally marginalized nations in the region. By developing their own energy resources, Israel, Cyprus, and Greece can take charge of their energy needs and rely less on their hostile neighbors. Already, Lebanon has issued a dispute over the boundary of Israel’s EEZ. Turkey has made, thus far, empty threats to disrupt Cypriot-Israeli exploration of oil reserves in the joint EEZ.

As far as longer-range security concerns go, if oil and/or natural gas were to come online from this “Energy Triangle,” it would substantially weaken Gazprom’s monopoly over Europe, cutting Putin’s Russia down to size. Greece and Cyprus are fairly desperate for any sort of new industry, be it electricity or hydrocarbons, given the spectacular economic collapse that they have undergone in recent years. Moving forward, this project as well as other potential energy projects promises to further integration of regional markets and unite neighbors in an otherwise hostile environment.

                                        Above: Area affected by LAPPSET Project

LAPSSET                                                                                                                                                          The Lamu Port and Lamu-Southern Sudan-Ethiopia Transport corridor is, perhaps, Africa’s most ambitious infrastructure project ever. Spearheaded by the Kenyan government, the plan is vast and calls for the construction of several highways, the building of a number of modern rail routes, the creation of new airports, and the construction of a sea port at Lamu. At the cornerstone of the project is the construction of a resort and deepwater port at the ecologically and historically significant site of Lamu (listed as a UNESCO World Heritage Site) and a proposed crude oil pipeline connecting South Sudan’s oil reserves to the Kenyan port. Thus far, I have only included the proposed oil pipeline, as it is difficult to obtain reliable plans for the totality of the project. You can read more about the project here. For the purposes of this post, the discussion of LAPSSET will focus on the port and pipeline.

Initiated in March 2012, the roughly $25 billion project promises to develop a long-range vision for East Africa. Thus far, the construction of the port is mostly complete and the construction of a series of berths are under way. As far as the highway component of the project, one section is complete and four other segments, connecting Kenya, Ethiopia, and Tanzania are currently under construction. A transmission line connecting Malindi and other coastal locales to Lamu has been completed while other transmission lines are being built from Lamu to Lake Turkana, towards the interior of the country. There are yet more transmission lines being considered and studied for construction as part of the plan.

Why It Matters                                                                                                                                               Aside from the improved standards of living and increased business potential that the project offers Kenya, South Sudan, and Ethiopia, LAPSSET has the potential to transform the way Africans and foreigners view the continent. If the project comes to fruition, or at least mostly, it would be a major victory for self-initiated peace and progress in a region that is better known for its hostility and lack of cooperation. The fact that the project originates from Africa would be a step away from foreign intervention— a welcome and positive change.

More tangible, though, would be the benefits to the fledgling South Sudan. The newly-independent state has suffered from years of exploitation and negligence at the hands of the Omar Al-Bashir government and, as a result, is possibly the world’s least-developed nation. At the heart of the North’s longstanding exploitation was the fact that the majority of Sudanese oil reserves are located in the ethnically-distinct and religiously-diverse South while the ports connecting the oil to international markets are located in the North. As such, the Sudanese government hogged and continues to hog, a disproportionate share of the oil revenues, creating the development disparities visible today.

The LAPSSET project offers the politically-fragile and generally backwards South Sudan an alternative route through which to export their oil. Not only would South Sudan’s participation in this project increase it’s negotiating position with Sudan, but it would engender goodwill among two nations (Ethiopia and Kenya) that supported its hard-fought independence struggle. Not only does LAPSSET have the potential to transform East Africa and set millions on the road to prosperity, but it can weaken aggressive and repressive regimes that oppose American interests.

These projects show much promise both in serving regional economic ends and in promoting democracies and the progress of oppressed peoples in “difficult neighborhoods.”