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How Christians should view the Paradise Papers

A long list of the rich and famous including Lewis Hamilton, Bono, and the Queen, have been named by the BBC as having used “tax havens” following the latest leak of information from an offshore law firm.

Following the French term for “tax havens” as “fiscal paradises,” these stolen files have been called the “Paradise Papers.”

Clearly an offshore finance centre is not the Christian idea of Paradise (although the description of heaven that “the sun shall never plague them” does remind me of the Isle of Man), but what are the ethics of this situation? Are these arrangements something a Christian can take part in?

Render unto Caesar

First, and most obviously, the Bible tells us that we must obey the laws of the place that we live, including paying taxes. That is the “render unto Caesar” that Jesus commanded, expanded by St. Paul who makes it clear that paying tax is part of our general duty of obedience to the government.

However, the obligation to obey the law may not be unlimited. Some laws should be broken, and there is a long Christian tradition of civil disobedience when necessary. (Indeed the information used by the BBC was obtained illegally, which presumably they feel is justified.) But that need not concern us here.

Despite all the excited reports by the BBC and newspapers, there seems to be little or nothing to suggest that any illegal tax evasion has taken place. Nor is that surprising; the law firm whose files have been made public is one of the most reputable in its field (which even, some years ago, hired me to give a lecture on the economics of international tax), and the offshore finance centres involved are some of the best regulated anywhere.

What “should” we pay?

But even though people have acted within the law, morality is wider than legality, and the suggestion being made is that the rich and famous have – somehow – done something wrong.

But the more you know about taxation, the more you realise it isn’t that simple. Our tax systems, designed by governments and voted on by parliaments, are extremely complex. It is not at all clear that one can make general assumptions about how much tax anyone “should” pay.

The top rate of tax in the UK is 45 percent, so perhaps all the wealthy should be paying 45 percent? But the top rate isn’t always 45 percent; for dividends it is 38.1 percent, for capital gains it is (usually) only 20 percent. Since people can choose how to invest, and thus what type of income they get, what tax rate “should” they be paying? And then governments, including our own, give various tax exemptions, so it is not even clear that all income “should” be taxed at all.

When our money can, entirely within the expectations of the tax system, be taxable at anything from 0 percent to 45 percent, there is no consistency from government and, therefore, no clear message as to how much tax “should” be paid. So the only reliable guide is what the law tells us to pay, which it seems the people in the Paradise Papers have obeyed.

One of the important things about offshore finance centres is that they can enable good things to happen, which tax or other problems would otherwise make impossible.

Nor is the answer to pay “as much as you can.” I am sure that we have all seen enough incompetence in governments and enough examples of governments doing things that, to a Christian, are downright wrong to realise that giving governments more money is not always the best thing, or even necessarily a good thing.

Most of the supposed scandals in the Paradise Papers are about investment. In many cases that investment – which is developing new technologies and creating jobs, often in poor countries – will have done more good than many government programs.

Enabling

To understand the morality, it is important to understand how tax havens actually work. It is a natural assumption, by people who do not work in this area, that “tax havens” are simply a way of doing something that one was going to do anyway, but paying less tax in the process. However that is often not the case.

One of the important things about offshore finance centres is that they can enable good things to happen, which tax or other problems would otherwise make impossible.

That is seen very clearly in the Paradise Papers’ “exposure” of the Duchy of Lancaster. The Duchy, an ancient estate that gives financial support to the monarch, has apparently invested in an “offshore” fund based in the Cayman Islands. These are “collective investment” funds, which various individuals and institutions put their money into for it to be invested, managed by professionals.

These funds are commonly based in tax-free jurisdictions – but not to allow anyone to escape paying tax. The profits of the businesses the fund invests its clients’ money in remains subject to tax. The clients are still taxable on their investment income and gains from the fund. But a similar fund based in the UK would be taxed on its investment income and gains, commonly at 19 percent – and that extra tax charge doesn’t make sense. The fund is not making that income for itself, but for its clients, who are already taxable. What is the sense, or moral justification, for taxing the fund as well?

If large investors, such as the Duchy, did not use offshore funds, they would not use an investment fund at all; they would make their investments directly, and pay tax on their investment income, just as they do for offshore income. But there would be no other layer of tax, because that intermediate fund would not exist.

However that would not be the best way to invest. Even these large institutions cannot have people who are experts in every single area of investment. It is better for them to invest in a range of offshore funds, each managed by professionals who are experts in their particular area, to benefit from a broader range of knowledge. Many of these funds specialise in niche areas, such as environmental technology or developing countries, which would otherwise be too specialised even for big investors.

The alternative?

The alternative to offshore funds is not for big investors to use onshore funds and pay an extra, unnecessary, level of tax. The alternative would be for less efficiency, less expertise, less variety in investment, less job creation and funding for human flourishing – and still no additional tax revenue.

What would we prefer – that big investors legally put money into offshore funds that help finance developing business sectors, or that they just stick it into the London property market?

Closing off access to these offshore funds would make it more difficult for businesses to access the capital they need to develop and grow, particularly niche businesses and firms in developing countries. That would make us all poorer, and it would not be an ethical approach.

Despite the unexamined assumptions of the BBC, it is by no means clear that using offshore funds is an immoral option.

(Photo credit: neepster. This photo has been cropped. CC BY-SA 2.0.)


Richard Teather is a senior lecturer in tax law at Bournemouth University. His personal website is www.teather.me.uk.