Thursday, August 30, 2012

In defence of Offshore tax havens

Except when the residents of any community are not genuinely free to leave it (for whatever reason), logic tells us that members of the community have consented to be bound by all the community’s laws. That’s only common sense. They may not like all the laws; they may even hate and resent some of them, and agitate to have them changed. But whatever their feelings, they always have these three options. 1) They can stay and work to change the laws they hate; 2) they can stay and accept the laws they hate; or 3) they can leave. I can’t think of a fourth option.

Tax laws, gun laws, traffic laws, abortion laws, it doesn’t matter which laws. If your strata committee orders you to paint your front door purple, and you don’t like purple, the same three options exist. If your spouse snores all night and keeps you awake, same thing. “Community” is a broad concept.

If a community’s rulers are crooks or charlatans, liars or tax-dodgers; if they are sex-maniacs or half-wits or psychopaths; if they do things that are illegal, immoral or stupid: the options are always the same. The USA has been cursed with elected or appointed officers who are all of those things; so has Britain; so have most nations in history. In all cases, their subjects have been faced with the same three options. Some of their subjects have knuckled under, some have rebelled, some have fled.

As a longtime resident of an Offshore tax-haven (and a former resident of two others), I marvel at the criticism levelled at Cayman, Bahamas, Bermuda and all the other Offshore centres. Lately, there has been a lot of fuss in the USA over Mitt Romney’s use of Cayman to minimise his exposure to US taxes. I find little to like about Romney, and I know almost nothing about US tax laws: but I find it hard to believe that he has defied the laws. More likely, he is simply taking advantage of loopholes in them.

In technical terms: he would be avoiding taxes, not evading them. Avoidance is legal, evasion is illegal, and the practical difference is the price of a good tax-lawyer. Logic tells us that Americans who have the means to leave their country but don’t, have consented to accept their tax laws, or are working to change them. Hey, that’s life. Leave us out of it.

Offshore tax-haven sectors, generally speaking, exist to accommodate rich people with clever and high-priced lawyers. Poor people can’t afford to pay expensive lawyers to read every line of the wretched IRS code. Clever lawyers sniff out loopholes in the code, and recommend them to their rich clients in exchange for exorbitant fees.

Americans who resent Offshore tax-havens should ask themselves this: Who is it that composes the IRS code, and leaves the loopholes? The US Congress and its minions, that’s who. Second question: When each loophole is discovered by some clever and high-priced lawyer, whose responsibility is it to close the loopholes so that they can’t ever be used again? The US Congress again. Well, fancy that!

Who benefits from the existence of the loopholes, besides Mitt Romney? Answer: IRS employees, clever and high-priced lawyers and their employees, residents of Offshore tax-havens, Mitt Romney and colleagues, and – ta-dah! Members of the US Congress and their minions. Sigh. Who ya gonna call – taxbusters? Huh. Ain’t nobody here but us chickens, boss!

We in the tax-havens don’t feel guilty in the least. We pay plenty of taxes, down here: just no Income Tax. We believe Income Tax is theft. Well, isn’t it?

Sunday, August 26, 2012

Our bloated public sector

Why is there so much fuss about laying off government workers, and so little fuss about private-sector ones? The economic effect of laying off government workers is actually the lesser.

Every fired employee in Cayman gets whatever severance pay is due, plus accrued vacation pay and pensions entitlement. Everybody is added to the unemployment registers, and some become an additional burden on the Social Services budget.

But with government workers, there is no diminution of economic productivity, since governments produce nothing of economic value. Besides operating loss-making enterprises, most of what a government does is transfer money from some citizens to others.

Anyway, laying off government workers is only a sustainable saving in the context of a permanent reduction of the scope and reach of government. If a reduction is not intended to be permanent, it’s a waste of time. Closing down our Department of Tourism, for instance, or selling Cayman Airways to private investors, would be a futile gesture if the action were reversed as soon as the immediate fiscal crisis were over.

An across-the-board layoff of even a third of our government employees would save over $100 million – say 1500 workers at the average $40,000 annual salary, plus perks and overheads, plus office space. There would be a one-off charge against Public Expenditure for severance pay and the rest, but that would be largely offset by the removal of lifetime medical care for former Civil Servants and their extended families.

The Social Services Department would be hit for a few million dollars a year until the redundant workers found jobs somewhere in the private sector. If they could, of course. In an economic recession, there are few jobs available in the private sector, especially for government workers whose skills and work-ethic are not regarded at all highly by private employers. Hmmm. What to do?

In Cayman – no problem, man! Here, the natural thing to do would (will) be for government to force private employers to hire all the laid-off native Caymanians among them, regardless of quality. Bizarre though that will sound to non- residents reading this commentary, that is exactly what will happen, if our London masters insist on a reduction of Caymanians employed in the public sector.

After all, our Immigration Monster has no qualms at any time about forcing private companies to hire Caymanians they don’t want or need. Politically appointed commissars already monitor all private-sector hirings, promotions and firings, as part of the permanent affirmative-action program for native-Caymanians.

You’d think that Cayman’s rulers (at least the ones in London) would be keen to raise these Islands’ productivity and efficiency to competitive levels. I mean – do they (our rulers) want to break the current pattern of irresponsible governance, or don’t they care about the future?

A labour-market model adopted in Britain’s Caribbean colonies in the 1830s in the wake of the Emancipation of the Slaves is ridiculously inappropriate these 180 years later. It’s not just archaic and inefficient, in an economic recession it’s downright counter-intuitive.

Unless the FCO recognises the economic virtue of a free market for migrant workers, all the present quibbling about a sustainable Budget will go for naught. Imposing extra taxes on a private sector already struggling with excessive payrolls imposed by the commissars? London, what are you thinking?

Thursday, August 23, 2012

Marketing skills – FAIL (the West’s credibility)

A few months ago a Chinese dissident was somehow smuggled into the US Embassy in Beijing. Although embarrassed and angry, the Chinese government allowed the dissident safe passage to the international airport and a flight to the USA. Last week an Australian dissident was granted political asylum in the Ecuadorean Embassy in London. Embarrassed and angry, the UK government refused the dissident safe passage to the airport and a flight to Ecuador.

What a contrast! What a topsy-turvy world we human-rights advocates find ourselves in, when a British government is more openly thuggish and less honourable than a Chinese one. Overnight, sixty years of propaganda, painting the Chinese Communists as savages, have gone up in smoke. It’s as though two rival baby-food manufacturers were found to have poison in their jars, and one recalled all its jars and the other didn’t. “Propaganda” is simply the marketing of ideas, and Britain’s idea of human rights failed miserably, last week.

We think of marketing as a particularly Western skill. After all, it is Western companies that sell fizzy drinks and cigarettes and hamburgers in all corners of the world. It’s a puzzling anomaly that Western governments have become so hopeless at political propaganda in recent times. They used to be so good at it. What went wrong?

The US is the classic example of marketing failure. Yes, it can still bamboozle most of its subjects – and not just Nascar Nation, either. But its hold on the minds of its middle-class citizens is weakening steadily, as is its credibility with the Western middle class in general. Invading Iraq & Libya & Yemen & Somalia & Syria while preaching peace to Iran is humbug pure and unadulterated.

Last month America’s rulers bribed and bullied Australia’s politicians to allow a US military base in Darwin, as a tripwire for any enemy invasion – “enemy” being what Americans call a “dog-whistle” code meaning China, on the Pacific rim. Grateful applause from the politicians and the gullible, scorn from much of the educated middle class who regard the USA itself as the most likely enemy of the Australian people. Whatever else China is, it’s not an empire on the rampage. It’s not the world’s Bad Guy any more.

And that perception illustrates the failure of the West’s contemporary propaganda. Today, Amerika (sic) is the Bad Guy, at least to those of us who reject the biased reporting of the bought-and-paid-for mainstream media. We don’t believe what Big Brother tells us, though we do believe in Big Brother.

In Orwell’s novel “1984”, Britain’s role was that of a cipher – “Airstrip One”, a frontier post of a futuristic American Empire that is perpetually at war with its chosen enemies. The purpose of the war is not conquest so much as the utilisation of resources and the suppression of middle-class dissidents and the ignorant lower classes.

(The book implies that the resources are all owned by the state, but they could as easily be owned by the individuals behind the imperial throne. Communism and fascism were equally despicable, in Orwell's eyes.)

One of Orwell's characters wonders whether the war itself is perhaps a fiction, with the Empire bombarding its own territory in an endless series of false-flag attacks. Hmmm. Last week a former US Marine was declared mentally ill and locked away for publicly disbelieving the official conspiracy theory of 9/11. By 1984’s definition, it was mad to disbelieve whatever the Ministry of Truth said was the truth.

Today, the book seems to have been adopted as a kind of instruction-manual by Western rulers. That’s how today’s middle-class skeptics view Britain’s threat to abduct the Australian dissident and deposit him in the Ministry’s torture-camp at Guantanamo. Well, I shouldn’t say “torture-camp”: better perhaps say it’s a compound where salesmen can exercise their persuasion-techniques on reluctant focus-groups. (Now that’s clever marketing, eh?)

Saturday, August 18, 2012

Our unbalanced budget, part two

When the tide goes out, you see who’s been swimming naked.

Warren Buffett’s wry observation about risk-taking investors applies equally to risk-taking money-managers in government. As the tide of easy money from taxes and loans recedes, the naked incompetence of politicians and senior Civil Servants becomes obvious.

Our local rulers are exposed now. Years of irresponsible management have left our government overspent, overborrowed, and with no cash reserves in the kitty. Nobody even knows how much it owes. Civil Service pensions aren’t included in the Public Debt, and no actuarial estimates are available to tell us within half a billion dollars what the total expense might be in respect of the pensions, lifetime healthcare benefits and airfares, etc, etc, etc. We’re never even told what all the perks of office are.

The workplace activities of Civil Servants are completely unmonitored. Is it a fact that two thirds of all Civil Servants manage private businesses from their offices? If it is, then the Service needs to be double-staffed just to get a few hours of official business done, during each “working” day.

Much of the government’s business is make-work tailored to the needs of our crony-corruption system. Bureaucratic empire-building is the norm. Waste and extravagance are the rule. Our current budget-problems are the result. The hundred-million-dollar Administration Palace on Elgin Avenue is half-empty, while acres of office space are rented from lucky, lucky, owners of buildings scattered throughout George Town. The new school out on Frank Sound Road will hold a thousand pupils, and seat a hundred of them.

What could we most comfortably do without, to balance the budget? Private-sector professionals could do the job of the Department of Tourism infinitely better than the government amateurs do it. Close it down. The Department of Finance was created as a state version of the Chamber of Commerce. Close it down. The Turtle Farm can’t even keep its live inventory alive, for goodness sake. Close it down. Pedro’s Castle and its sister “tourist attractions” would be unattractive to private investors, even for free. Close them down.

CINICO (the state health-insurer, a notorious white elephant) should transfer its clients to one or more of the private insurers, accompanied by generous subsidies. Any half-decent private-sector firm could arrange that in a week, though it might well take a Civil Service committee 52 times as long. The George Town Hospital is a hodge-podge that should be broken up immediately. Why does government own and manage Cayman’s biggest pharmacy? Sell it off.

The Immigration Monster should be stripped of its non-immigration functions, profitable though those are for its employees. Lease those functions out to private contractors. Scrap the post-slavery indentures-system and get rid of all the corrupt practices that infest it. Issue Work Permits to foreign workers instead of their employers.

Requiring the public sector to share the pain would bring balance to the Islands’ GDP (Gross Domestic Product), and stop the inexorable growth of the bloated parasite that is our government. Laws and practices that favour public-sector growth simply foster inefficiencies and corruption. To their shame, our politicians and senior Civil Servants refuse to even think of shrinking any aspect of government.

 Instead, they follow a path that leads to central control of our entire private sector. If the trend continues, there will come a day when every private company of any size has a government appointee among its directors. If – or, more likely, when – that situation comes to pass, Britain really will have a problem with this little territory. I wish the FCO’s clerks were aware of that danger; I don’t believe they are.

Thursday, August 16, 2012

Cayman’s unbalanced budget

At the moment of writing, our London masters (the British Foreign & Commonwealth Office) have just rejected McKeeva’s latest proposed budget for the current fiscal year. The proposed tax-increases are not sustainable (more will be needed next year), and the proposed expenditure is still too much. Our local rulers ought to learn from the experience of Greece and the other PIIGS nations. In a recession, government revenues decline. Any and all government budgets based on last year’s revenues are therefore false.

We read of declines in nations’ GDPs. (GDP stands for Gross Domestic Product, the value of all goods and services produced by a nation's economy). Since goods and services produced by the state itself are of minimal net value, objectively speaking, declines in GDP apply almost entirely to the private sector. Governments (politicians and senior Civil Servants) could bring balance and stability to a decline by requiring their public sectors to share the pain, but they don’t.

Mostly, they refuse to lay off government workers to match the private sectors’ layoffs, or to cut expenses to match the private sectors’ cuts, or to increase productivity to match the private sectors’ efforts, or to achieve surpluses to match the private sectors’ profits. Most governments don’t do any of those things. They prefer to maintain their public sectors’ status quo, while private businesses go broke and private employees lose their jobs and savings.

That preference aggravates the problem. Insolvent private companies and individuals don’t pay taxes, so government revenues spiral downward. In Cayman’s case, much of our Public Revenue is generated by our Offshore tax-haven’s local administrators and employees. Economic declines in their clients’ home nations adversely affect Offshore administrators’ incomes and their governments’ revenues. We know that from previous recessions. This time, the recent threat of Income Tax will add impetus to the decline, if it hasn’t already done so.

Any budget will be invalid that is based on invalid revenue projections. Reducing expenses then becomes essential, not optional. If our FCO masters in London fail to recognise that accounting truth, they had better brace themselves for a budget shortfall by the end of the year. Balanced budgets depend (in the first instance) on the accuracy of revenue projections.

Our local rulers’ public vow to cut neither Civil Servants’ numbers nor their remuneration will come back to bite them. If I were in a position to do so, I would cut numbers, but not remuneration. After all, employment contracts were agreed in good faith. So the outrageous salaries, perquisites and pensions cannot properly be changed unilaterally. Nor can the abysmal productivity levels agreed on at the time of hiring. Maybe the hirers should be hanged for such an egregious economic crime – and the case for that is strong – but contracts can’t properly be scrapped out of hand.

Changing the terms and conditions of government employment is crucial for the future of Cayman, but it isn’t urgent. It will probably take direct rule from England to effect the necessary changes, anyway, and that may be a year away. What could be done right away, however, is to abolish selected government units and departments, so that their employees become redundant. “Made redundant” is not the same as “fired”.

Which units and departments should be radically trimmed or abolished, and how the redundant staff should be cared for, will be covered in follow-up posts. The redundancies I have in mind might save a hundred million dollars a year in operational expenses, and another hundred million in capital expenditure. That would give us balanced budgets for years to come.

London, are you making notes, here? You damn well should be.

Wednesday, August 8, 2012

What other taxes might be on the agenda?

Our local rulers have achieved three stunning victories this past fortnight. First, they have guaranteed that the mutual mistrust between expats and native Caymanians will not be bridged until a whole new generation has grown up; second, they have put us all on notice that the scope of government will keep expanding indefinitely; and third, they have pulled the plug on our Offshore industry. Short of a unilateral declaration of independence from Britain, there isn’t much more damage they could have done to us.

A tax on Work Permit expats’ wages and benefits will be but the harbinger of a general Income Tax for everybody; we all know that. Cayman’s social contract has been betrayed; the governed can never trust their rulers again; the seal of Pandora’s box has been broken. Income Tax will always be on the agenda, now.

 Connivance between the expats and their employers would (will) reduce the tax’s yield sufficiently to require an expansion of the program. Shortfalls would probably be made good by a tax on their local rental income, then on their local property and other investments, then on their worldwide income and capital gains. Imposed one at a time, in succession, each of those would please the xenophobes whose votes decide Cayman’s elections. (No MLA has ever been elected on a pro-expat platform.) The 'phobes are having a whale of a time jeering at the expat victims already.

If the number of Work Permit residents were to decline – as a consequence of either the tax or the jeers – Public Revenue would decline and new sources of revenue would have to be identified. It's clear that Public Expenditure is our sacred cow, now, well beyond the reach of any fiscal reform. It may never be reduced.

The natural next step would be to extend the Income Tax to Caymanians right away, and everybody is expecting that to happen. I’m not. I expect the political gangs first to go after the Offshore firms and banks and their overseas clients. That would be madness, of course; but the clowns have zero understanding of how international tax-havens work. All they see are trillions of dollars passing through Cayman each year.

"We gotta get some of that! What harm could it do to tap those trillions for a lousy billion or two? Even one hundredth of one per-cent would do, to begin with. We should tax all the wire-transfers in and out of Cayman’s banks; that’s only fair. What could possibly go wrong?"

If that source were to produce less tax than expected – as a consequence of fewer transactions – yet another new source would need to be identified. The first new source might be the profits made by the large local companies – construction, hotels, banks, supermarkets, CUC, Cable & Wireless, and the oil-importers.

For years now, government’s Statistics Office has been wheedling financial information out of those companies, on the pretence that the World Bank wants it. Despite widespread resistance, and stories of outright false reporting by some small businesses, the Office must by now have a rough idea of every commercial sector’s profits, and how much money a general profits-tax would raise.

Oh yes: there are plenty of targets available, for a government bent on forcing the populace to pay (directly or indirectly) for the bloated and inefficient government payrolls, its outrageous travel expenses and all its other wastefulness. To date, the FCO clerks in London have rejected every one of Cabinet’s proposed Budgets for the current year. Typically, they are not advising on specifics, just demanding that the FCO’s general guidelines be followed.

If our representatives continue to ignore those guidelines, there will be no Budget at all, and the FCO will take over, as it has done in Turks & Caicos. Might our ruling MLAs then cry havoc and demand immediate political independence for Cayman? Indeed they might. And that’s the fear.

Saturday, August 4, 2012

Permission to travel (T11 - Russia & Syria 1960s)

(This is the eleventh in the series of travellers’ tales for my grandchildren) 

If we’d known, we’d have slept in! As it was, we were showered, breakfasted and packed, ready to hit the road at nine o’clock. Our next mandated sleeping place was a 250-mile drive away – say six or seven hours without pushing, with time for coffee-breaks. Our Russian visa (USSR, at that time) limited us to specific roads and specific accommodations on specific dates.

After three nights in a cabin at the Moscow camping ground, using up some of our illegal roubles (see my T-4 posting in the archives), we were ready for the road to Minsk. Finding our exit blocked by roadworks was a serious setback. If we didn’t make Minsk that night, we would be in breach of our visa, which might have meant all kinds of complications. Grading the road between us and the highway – well, OK; spreading tar for half a mile in both lanes, with no way around, was a ridiculous thing to do.

I conveyed my opinion to the foreman, and begged him to stop. No can do, squire. Orders are orders. They had to finish the job today. We wouldn’t be able to leave before about 5 o’clock; the tar ought to be dry by then. We discussed this for a while, man to man: he in Russian, I in English, assisted by vigorous hand-wavings. In the end, he conceded that his orders didn’t actually specify that both lanes must be done at the same time. (Gad, these Westerners! No wonder they’re winning the bloody Cold War!)

That still left two hundred yards of slow-drying tar on both lanes, and one lane tar-free after that. We waited as long as we prudently could before crossing our fingers and crawling gingerly over it at nought miles an hour. But of course my little white Beetle picked up a million black specks before we reached the graded part. I tried hard to undo the damage that night, but you can never get all of that stuff off once it’s dry. Ach, it could have been worse.

Russia was the only country that limited our travelling freedom to this degree. Every nation has its restricted areas, but nowhere else did we have a rigid itinerary and schedule. Usually, we got our visas either a day or two before entering a country or at the border on the way in. Russia required a bit more notice than that.

However, it wasn’t always wise to get a visa too soon. Linda accidentally got herself locked out of the entire Arab world when she applied for a Syrian visa in London six months ahead of time. A few days after we began travelling together (see T-2, Zorba), I noticed some Arabic writing in her passport, put there by the Syrian Embassy in response to her application. It sure didn’t look like a visa; but what else could it be?

The British Consul in Istanbul (whose terms of reference included helping Australians, since there was no Australian Consulate there) translated the words for us. “The Republic of Syria, mindful of its moral duty to support its dispossessed brothers in occupied Palestine, does not issue visas to persons intending to visit the Zionist entity calling itself Israel.” Or words to that effect.

Oh dear! No Arab nation would ever issue a visa in the face of such a note. Either we abandoned our travel plans for the Middle East or... well, or not, as it happened. The British Consul, gallant fellow, issued Linda a UK passport good for twelve months, and we mailed her Australian one back to London.

So we did our Middle East thing – and never even made it to Israel after all. We only spent a few days in Syria, on our way from Palestine to Lebanon, and we bought our visas at the border-crossing while the bus waited.