How Britain's tax havens imperilled the welfare state

Spending promises will be meaningless so long as the rich can dodge taxes and hide wealth offshore. 

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Does anyone really need to be a billionaire? If you earn £80,000, should you be taxed more for it? Labour’s 2019 manifesto has sparked a number of conversations about tax. The party’s ambitious high-tax, high-spend agenda would raise UK taxes to their highest peacetime level and mark a return to welfarism. But in order to deliver on these promises, Labour would first need to confront the insidious role that tax havens play in sucking wealth offshore and setting the tenor for debates about tax in the media. 

Though tax dodging typically brings to mind sovereignties like Switzerland and Luxembourg, Britain is undoubtedly the protagonist of twenty-first century tax havens.

According to an index produced by the Tax Justice Network, the world’s three most corrosive corporate tax havens are British overseas territories: The British Virgin Islands, followed by Bermuda and the Cayman Islands. Their roots lie in the patchy decline of the British Empire during the latter half of the last century, which allowed offshore enclaves in former colonies to flourish.

Today, a global network of tax havens emanates outwards from the City of London. As the journalist Nicholas Shaxson describes in his book Treasure Islands, Britain’s offshore network has an inner ring of crown dependencies and overseas territories like Jersey and the Cayman Islands, and an outer ring of former colonies like Hong Kong. The latter maintain close ties to the former mother country. From Guernsey to the Bahamas, Singapore to Anguilla, many of the world’s major tax havens are either current or former British overseas territories in one form or another. 

The uneven and decentralised nature of the British Empire proved the perfect fit for nascent tax havens in the nineteenth and twentieth centuries. Sovereignty wasn’t concentrated in Westminster, but rather dispersed across multiple layers of government: crown colonies, protectorates, dominions and overseas territories. This allowed local governments to oversee corporate accounting and tax laws. Generally, tax codes that were applied to British residents in the colonies were much lower than those in the UK. British colonial residents could also qualify for various exemptions from local taxes, or remain confident that local authorities lacked the resources and enforcement powers of the Inland Revenue back home. By the early twentieth century, Britain’s courts had created the legal notion of “virtual residencies”, allowing companies across the globe to become incorporated in British imperial jurisdictions but avoid paying British tax. Fortunes were being built across Greater Britannia.

After the Second World War, the twin threats of decolonisation abroad and the high-tax welfare state at home threatened to undo this system. As Keynesian economics drove the rebuilding of Europe, company profits were taxed at rates as high as 40 and 50 percent – levels unimaginable in today’s Britain. At the same time, newly emboldened postcolonial governments began staking a claim to a greater share of corporate profits. Suddenly, the convenient system of elite tax exceptionalism was squeezed from both sides. As the corporations and individuals who had earned their money in former colonies like Kenya, Ghana and Jamaica sought ways to protect their wealth, remaining outposts such as the Cayman Islands and British Virgin Islands provided a lifeline. The Caribbean became the preferred hideaway spot not only for Britain’s wealthy, but also for British wealth.

Successive governments did little to impede the spread of tax havens. In fact, institutions like the Bank of England and Britain’s overseas development ministry actively championed offshore enclaves, believing tax havens could attract foreign investment and stimulate economic growth in the remaining British Overseas Territories. And in an audacious appropriation of arguments made for decolonisation, the British government often rebuffed criticism of its lax stance on tax havens by claiming it didn’t want to interfere with the independence of overseas territories. Overseas territories like the Cayman Islands, whose legal system is approved by Her Majesty’s Privy Council, and whose Head of State is still the Queen, have a complicated relationship with the signifiers of old-world power. The seal of the British state gives foreign investors the confidence to bury money in these jurisdictions, and local banks and politicians have little interest in rescinding them. Indeed, Bermuda voted against its own independence in 1993.

Even British politicians who were sharply critical of tax avoidance, like Labour PM Harold Wilson, thought legalising tax havens would be a legitimate way to promote economic development. The most generous reading of this inconsistency is that British politicians hoped overseas territories would ultimately become productive economies like the “developed” motherland. In reality, the opposite happened.

From the 1970s onwards, offshore Britain provided a base for corporate interests to undermine state intervention, first across in the decolonised world and then back home in Britain itself. Multinational corporations used the protections afforded by the offshore world to push governments into a race to the bottom on tax levels, rolling back regulations and social protections almost everywhere. The threat of capital flight – where companies threaten to fly the nest for more tax-competitive nations – has set the tone for discussions about tax in the British media. Today, we perceive even tame increases in corporate and high-earnings taxation, such as those proposed in Labour’s 2019 manifesto, as impossible.  Britain already has the lowest corporate tax rate in the G20 and lower income tax than most other “developed” countries, but the idea that any government could challenge this state of affairs is denounced as bringing on an economic apocalypse. The tax haven model has come home to roost. 

Of the many challenges facing the British left, offshore Britain is perhaps the most acute. Britain’s tax havens have imperilled the pursuit of a high-tax, high-spend return to welfarism. They have allowed multinational corporations, requiring ever-fewer protections from friendly governments, to wield the upper hand. A Labour government willing to take on this fight could have huge consequences across the world. The UK could close tax loopholes to overseas territories, restrict offshore ownership of UK state assets or tax capital flows to and from tax havens. Offshore Britain remade the world over the last century. Any attempt to remake politics anew will face the challenge of undoing its work.

Kojo Koram is a lecturer in Law at Birkbeck College, University of London. He has written for The Guardian, The Nation, Dissent and The Washington Post, and is the editor of The War on Drugs and the Global Colour Line (Pluto Press 2019).

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