Tax Havens, from Ancient Rome to Modern Panama


EspañolTax evasion has taken place long before the Panama Papers scandal. Modern scholars of the Roman Empire, in fact, have interpreted citizens’ hoarding of silver coins — denarii — as an attempt to keep truly valuable currency away from the tax authorities when emperors devalued the coinage in order to finance their expenses.

In Cicero‘s words: ut sementem feceris, ita metes — “as you sow, so shall you reap.”

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The modern phenomenon of tax havens, sovereign nations whose tax laws attract investment from foreign customers, emerged in the late nineteenth century. As Professor Ronen Palan explains in History and Policy, the first tax havens were not independent nations, but the US states of New Jersey and Delaware, where the policy of “easy integration” first came into place.

This policy allows a buyer to purchase an already-formed company and start trading almost instantly. At the same time, these states created highly attractive conditions for corporations by offering low levels of corporate tax. Palan notes the model was so successful that Zug and other Swiss cantons introduced it to Europe in the 1920’s.

Another key aspect of tax havens is the “virtual residence.” This concept was created in 1929 when a British court ruled the Egyptian corporation Delta Land and Investment Co., which bought and sold real estate in Egypt since 1904, was not subject to British tax laws. Although registered in London, the company was not active in the UK.

[adrotate group=”7″]According to historian Sol Picciotto, this ruling created a precedent for foreign companies to be registered in Britain and avoid paying certain taxes. Since the law applied to the entire British Empire, it was applied in many dependencies that are still tax havens. These include the Channel Islands, Hong Kong, Bermuda, Bahamas, and the Cayman Islands.

The last pillar of modern tax havens, “confidentiality practice,” was introduced in Switzerland with the Banking Act of 1934, which established the absolute protection of bank information under Swiss criminal law. As Palan explains, this is how Switzerland became a European tax haven. Shortly thereafter, Liechtenstein adopted the Swiss franc and the practice of banking secrecy, which did not impose requirements or restrictions on the nationalities of a company’s shareholders.

In the US, income tax, which did not exist permanently before 1913, grew so fast that, in 1981, a person earning US $500,000 a year lost 58.9 percent (or $197,959) of their income to taxes.

According to the US Internal Revenue Service (IRS), a company had to pay a corporate tax of 13.75 percent on all taxable income between 1932 and 1935. Between 1993 and 2002, however, companies had to pay 39 percent on profits larger than $100,000 and less than $ 335,000.

Clearly, the welfare state’s expansion in the developed world coincided with the rise of tax havens. This event would have hardly surprised a late Roman emperor.

After the Panama Papers scandal, it would be wrong to demand simply that citizens with funds in Panama, the Bahamas, and Anguilla be forced to pay national taxes. The truly important question is how governments can create the economic and fiscal conditions necessary for citizens to keep their money in their own country. Also, nations with oppressive tax regimes should take steps so that foreign companies can be established there as easily as they are in Monaco or Antigua.

As Winston Churchill said, “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

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