Tag Archives: Microsovreignty

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.


Microstates of Oceania

Oceania is a natural hot spot for the development of unique micro-cultures thanks to the sparse population, limited habitable land mass, and general geographic isolation. These different micro-cultures have led to the development of micro-societies which have, in turn, led to the development of an array of micro nation-states. So let’s dig in!

Nauru                                                                                                                                                                                                                   This second smallest state in the world boasts a whopping 8.1 sq. mi. populated by 9,378 residents. The island has experienced a capricious colonial history, having been unceremoniously tossed among various German, League of Nations, and Japanese mandates. In the late 60’s and 70’s, the country enjoyed the world’s highest per capita income thanks to its large phosphate deposits. Sadly, strip mining and other short-sighted mining practices left the island’s reserves depleted by the 1980’s, creating a huge shock to the nation’s economic livelihood. It was this crisis that led to Nauru’s short-lived status as a tax-haven. Nauru’s status attracted dirty money and unsavory elements to the island, prompting an end to the experiment. In recent years, the nation has been struggling to find more secure economic footing. To that end, the country is a member of the Commonwealth of Nations, United Nations, and the Asian Development Bank.                                                                                                                      Legally, Nauru offers its citizens some interesting protections. All native Nauruans have some claim to the land and the government, corporations, and any non-Nauruan is not permitted to own land; they may only rent land. Nauruans themselves are pretty unique, boasting the highest proportion of Baha’is in the world (10%) and some of the highest obesity rates. Approximately 97% of men are obese and 93% of women are considered obese. On October 26th, Nauruans celebrate Angam Day which commemorates the revival of the Nauruan people whose numbers have twice fallen below the minimum threshold (1,500) required for the survival of a race.

Kiribati                                                                                                                                                                                                         This Micronesian nation of 103,500 people encompasses some 313 sq. mi. of land area that straddle the Equator and 1.35 million sq. mi. of open ocean. It is the only country with territory in all four hemispheres of the globe. The name Kiribati is a local corruption of the name “Gilbert,” the name originally given to the islands after its European discovery by Thomas Gilbert. In the 1950’s and 1960’s, certain far-flung islands in Kiribati were used by the governments of the U.S and U.K. for nuclear weapons testing. Before the turn of the century in 2000 A.D, Kiribati moved the International Date Line just east of its Easternmost terminus, making it the first nation to witness the dawn of the third millennium. Currently, the nation is focused on preparing for what it perceives to be inevitable sea level rise caused by man-made climate change. Kiribati is an active member of the Alliance Of Small Island States (AOSIS) and a host of other climate organizations. Currently, there are plans to both evacuate large numbers of people from this low-lying atoll nation  and protect certain islands from potential sea level rise.

Marshall Islands                                                                                                                                                                                                    68,480 people call this Micronesian nation home, all 70 sq. mi. of it.  The legacy of nuclear testing in the Marshall Islands is hard to ignore as much of the Pacific Proving Grounds can be found in the country. The Pacific Proving Grounds were lands designated by the U.S government in the wake of the Second World War for the atmospheric testing of thermonuclear weapons. In fact, the largest nuclear test ever conducted by the U.S, Castle Bravo, took place in this nation. The first hydrogen bomb ever was tested on the country’s island of Elugelab, which resulted in the island’s destruction. Many islands and islanders have suffered from the adverse effects of atmospheric testing. In recent years, the Marshall Islands has made moves towards creating a more ecologically-conscious image by declaring the world’s largest shark sanctuary at 772,000 sq. mi. The U.S government is the mainstay of the Marshallese economy, contributing direct foreign aid and rent for use of the Kwajelein Missile Range.

Tonga                                                                                                                                                                                                                   As one of the region’s more prosperous states, Tonga has benefited from its historical legacy as a unified, organized kingdom. Incorporating 360 sq. mi. and housing 103,036 inhabitants, Tonga occupies the southernmost portion of the Polynesian island chain. Tonga was originally known to Europeans as the “Friendly Islands” due to their warm reception of James Cook. Tonga never lost its sovereignty and to this day maintains its monarchy. Traditionally presided over by the Tu’i Tonga, the chief of the islands, Tonga is now presided over by a constitutional monarchy. The government provides free and mandatory basic education, subsidized secondary education, and scholarships to further education abroad as well as a universal health care system. Like Nauru, obesity is prevalent with 90% of the population considered overweight and 54% considered obese. Also like Nauru, the government precludes foreign entities from owning Tongan land. The constitution observes and enshrines the sanctity of the sabbath. Kava, a Western Pacific specialty, is practically the nation’s official drink and is at the center of a ceremony rich with custom and tradition. The relatively large Tongan diaspora supports the national economy with its remittances.                                                                                                                                                                                                                       Tuvalu                                                                                                                                                                                                         The Polynesian island nation of Tuvalu has a reputation for “doing things small”; it boasts 10,837 residents (making it the 2nd-least populous nation in the world) across 10 sq. mi. enjoying the world’s smallest economy by GDP. Tuvalu experienced some of the strongest GDP growth in the Oceania region during the late 1990’s and through much of the 2000’s before stalling out in the face of the global recession. The government spends no money on maintaining regular military forces and minimal spending is given to the country’s police force. Approximately 65% of the work force is employed in the public sector and small-scale subsistence farming maintains much of the population. Remittances from Tuvaluans working on foreign merchant ships also forms an important component of national income.                             Additionally, the government raises substantial revenues from the lease of the country’s top-level domain “.tv” and the production of stamps bought by philatelists worldwide. The Tuvalu Ship Registry, a government agency under which ships of various nationalities may opt to register, came under fire in recent years when it was discovered that Iranian ships were registered in Tuvalu. The benefit to Iranian oil tankers was the ability to fly under the Tuvaluan flag during international boycotts of Iranian oil. Education is free, universal, compulsory for 10 years, and relatively well-funded. The minimum working age is set at 14 and child labor restrictions have been put in place. Overall, a traditional communal lifestyle with the cosmetic and structural facets of Western life is the daily reality for most Tuvaluans.

Federated States of Micronesia                                                                                                                                                        This Micronesian nation comprises some 106,104 people living on 271 sq. mi. of land spread across some 1,000,000 sq. mi. of the Pacific Ocean. The nation has some of the most extensive and best documented human history in the region. The nation is a treasure trove of archaeological sites, many of them stone. The historical saga of the islands is relatively complex thanks to the rise, invasion, and overthrow of a series of dynastic kingdoms dating back to the 1st and 2nd centuries A.D. On one of the four main islands, Pohnpei, is Nan Madol. Officially registered as a U.S. National Historic Landmark, Nan Madol is lagoon city of artificial islands constructed by the medieval Saudeleur Dynasty. The island of Kosrae also features historic towns and ruins from the city of Lelu (c. 1250 A.D) to burial pyramids found throughout the island.  There is not much economic activity as there are relatively limited phosphate deposits and agriculture is mostly limited to subsistence activity. Today, a growing number of expatriates are attracted to this underdeveloped nation due to its diverse ethnic mix, beautiful climate, and pristine coral reefs.

Microstates of Europe

Mapped above are many of the world’s microstates, defined here as recognized, sovereign nation-states with population less than 500,000 and area less than 500 sq. mi. While I could go on for months about these different nations (believe me, I could) I want to cover some of the highlights.

San Marino                                                                                                                                       As the world’s oldest surviving republic, San Marino is something of an anomaly. This tiny, rugged state of 24 sq mi. boasts some 32,000 residents and no flat land. The state is practically a fortress, located on steep, rocky ground and surrounded by beauteous medieval castles. Napoleon Bonaparte so admired this tiny nation that he respected San Marino’s autonomy. San Marino traces its history to  September 3, 301, when Saint Marinus of Croatia fled his island home during the persecutions of the Emperor Diocletian and established a monastery in what is now San Marino. The history and traditions of the republic survive today, making for an intriguing tourist destination.   

Vatican City                                                                                                                                                                                          The smallest sovereign nation in the world, Vatican City traces its modern-day origins to the Lateran Treaty of 1929, signed with the then Fascist government of Italy. Vatican City is the smallest recognized, independent nation-state by both land area (110 acres) and population (842). Don’t be fooled by its small size, the Vatican is perhaps one of the most symbolic and universally-galvanizing nation as it is the headquarters of the Catholic Church. Vatican City is, perhaps, Europe’s most notable theocracy. Don’t think though, that this 2000 year-old center of Western Christianity is out of touch with the times; the nation has its own website and Vatican City is also, arguably, the first carbon-neutral country in the world.

Monaco                                                                                                                                                                                                     Monaco holds the distinction of being the most densely populated sovereign nation in the world. This tiny country is world-renowned for its spectacular location on the enchanting French Riviera. The ethinically Italian House of Grimaldi ruled this tiny nation and led the monarchy that has become so central to this microstate’s identity. The place is also considered a tax haven and playground for the rich, home to the Monte Carlo Casino a now iconic resort destination. Despite French being the official language, the distinct Monegasque language continues to be spoken in this state.

Malta                                                                                                                                                                                                                  This tiny island nation located southeast of Sicily is one of the wealthiest, thanks in part to its tax haven status and attractive Mediterranean climate and lifestyle. Known as a playground for the rich, the largely “hands-off” government holds Roman Catholicism as the nation’s official religion. Indeed, much of the history of Malta is wrapped up with the Church. In the New Testament, St. Paul was said to have been shipwrecked on Malta where he established an episcopate of the church. The Knights Hospitaller, also known as the Order of St. John governed the island for 268 years, before succumbing to the great Napoleon Bonaparte. Malta was later a British protectorate before independence. Much of the Hospitaller’s legacy on Malta can be seen in the hospitals, fortresses, churches, and watchtowers. This nation boasts 3 UNESCO World Heritage Sites in its  121 sq. mi. territory.                     

Andorra                                                                                                                                                                                                                This independent nation located high in the Pyrenees between France and Spain claims the highest capital city in Europe, Andorra la Vella. This state was established thanks to a 988 A.D charter that was traditionally attributed to Charlemagne. It later developed a co-monarchy led  by the French head of state and the Bishop of Catalonia, a situation it still maintains. Currently, its two monarchs are Francois Hollande (prime minister of France) and Bishop Joan Enric Vives Sicilia. Though the official language is Catalan, Portuguese and Spanish are widely spoken as is French. It should come as no surprise that this tiny European microstate is yet another tax haven popular with tourists (roughly 10.2 million annually). Additionally, Andorra is ranked as having one of the highest life expectancies of any nation in the world.

Lichtenstein                                                                                                                                                                                                                             The tiny state of Lichetenstein is perhaps best known for having the highest GDP per Capita when measuring by Purchasing Power Parity (PPP). This alpine nation takes its name from the dynasty that gradually absorbed the territory of this nation. The feudal dynasty was never able to qualify for the seat in the Reichstag of the Holy Roman Empire that it sought. On January 23, 1719 Lichtenstein was declared to be a sovereign member of the Holy Roman Empire, the traditional founding of the modern-day nation.   Lichtenstein is one of two doubly-landlocked countries, that is, a landlocked nation surrounded by other landlocked nations (the other doubly-landlocked nationbeing Uzbekistan). Lichtenstein is also one of 15 nations in then world that support no military forces of any kind. The nation features low taxes and a favorable regulatory climate that has led to a thriving industry of holding companies registering themselves in the country.  One of the benefits of being such a small nation can be felt on the national holiday when all Lichtensteiners are invited to Vaduz Castle, the seat of the monarchy, for a reception.

Nota Bene: I plan to do posts about microstates in other parts of the globe in future installments.