Whilst most economies falter, tax havens will benefit from the expense of the virus

The UK’s recession being officially announced was hardly met with open arms, especially with it being the worst recession on record. Having suffered a 20.4% drop in growth in this year’s second financial quarter, the year’s first quarter figure of -2.2% and 2008’s quarterly decline of no more than 2.1% pale in comparison.

With the gruelling wait for the confirmation of the dire growth figures now (hopefully) ending, the question of how to fill the economic lacuna remains. The government has not been hesitant to introduce a mass scheme of capital injections, with Rishi Sunak’s £30 billion coronavirus budget being the proverbial cherry on top to the government’s already large spending project designed to counteract the coronavirus’s impact.

But as with all past spending sprees, there comes a cost of some form, whether it is a reduction in public spending or the introduction of tax hikes to compensate for the loss in revenue. The former option will no doubt increase accusations of austerity towards the Conservative government and disillusion working-class voters who supported Boris Johnson in the election last December. Yet, if the latter option was chosen, traditional Conservative voters who mostly situate themselves amongst the highest earners will not tolerate being penalised for having an above-average level of earnings.

Neither choice is easy for the government, especially the second one. Any tax increases will arouse the disgruntlement of most of the public. But by the same token, it will benefit one sphere which receives those who flee inadequacies to their fiscal affairs.

According to some estimates back in 2002, half of the world’s stock of money either resides or passes through tax havens. Many of these – such as the Isle of Man and Jersey – were established whilst the UK’s draconian tax policies were implemented in the 1970s when income tax reached as high as 98% for the highest earners. The current additional rate (for those earning over £150,000) is now at a relatively low 45%, albeit not as low as the 40% rate introduced in the Thatcher Government’s 1988 budget.

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This could all change however through the government’s policy of appeasement towards its voters. Already have some had enough foresight to relocate their money to havens where they will not feel the wrath of the taxman. Just as the virus was starting to approach its climax in cases in April this year, UBS announced that its profits increased by 40%. For Switzerland – where UBS is based – this was a welcomed miracle, especially now that the country’s attraction for offshore banking has declined after the country’s client anonymity was removed nearly two years ago.

The coronavirus is thus an opportunity for certain nations to prosper while others struggle. The Isle of Man – despite being referred to as ‘the island that swapped donkey rides for offshore cash’ by the BBC – has been dubbed as ‘not a very successful tax haven anymore’ after being ranked 32 in the 2017 Tax Justice Network Financial Secrecy Index. In this year’s index, it fell even further to 43. What gradual losses it has made over the last few years can be recuperated through the incoming wave of capital flight.

The Isle of Man and other tax havens like it may deny and be embarrassed by its status, but it is one that is a necessity for it to continue its long-standing uninterrupted growth rates. In the nation’s 2015/2016 national income report, e-gaming – the Isle of Man’s largest sector bar insurance – accounted for 17% of the country’s national income. Despite this, the industry suffered a 12% decrease in its share of income, ultimately resulting in a 3.4% decline in gross national income. A panacea – even if it comes in the form of an epidemic – is thus needed.

Government disgust towards tax havens has also become further entrenched by the virus, driving a wedge between national loyalty and economic rationalism. Along with Denmark and Poland, France prevented firms registered in tax havens from receiving government bailout money used to ameliorate those affected by the financial cost of the virus. Sunak also faced pressure to do the same for the UK, but realised that doing so would only encourage rich supporters of the government to flee also.

Pondering as to what is the right thing for the government to do will therefore not be easy to discover. By increasing taxes do tax havens become a gateway for escaping debts to public society, regardless of whether it is fair or not. Yet at the same time, tax havens do not have much in the way of viable alternatives to sustain themselves. Some – such as Switzerland – could survive as tourist hotspots, whilst others – such as the Isle of Man – not so much.

Additionally, tax havens are an indirect incentive for high-tax countries to perform better. The economist James R. Hines noted that ‘the availability of tax havens appears to stimulate economic activity in nearby high-tax countries’. Abolishing tax havens is thus impractical, for their existence produces a necessity that is the mother of invention for other countries. Instead, the question that needs addressing is how the British government will approach its fiscal policy that serves the needs of both sides of the tax pond.

Featured image credit: The New York Public Library on Unsplash

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