The report, International Financial Centres and the World Economy, which was commission by the international body that represents thousands of professionals working in the area of trust and wealth management around the world, was written by an academic from the University of Michigan and NBER. James R. Hines Jr. uses a considerable amount of academic research in his study rather than anecdotal evidence about the effect IFCs have on the rest of the world.
While the report has an obvious bias because of its backers, the use of empirical evidence affords the findings certain credibility and adds fuel to the argument that IFCs are not the source of all evil but are serious players in the global economy. The report suggests that the evidence flies in the face of currently held assumptions about offshore finance.
“IFCs occasionally raise concerns that they may erode tax collections, divert economic activity, and otherwise burden nearby high-tax countries. A large body of economic research over the last 15 years considers these issues, with findings that point sharply in the opposite direction: the evidence strongly suggests that the policies of IFCs contribute to investment, employment, and the efficient functioning of markets and government policies in other countries,” Hines writes in the report.
According to his findings, the evidence reveals that IFCs are not the locations of choice for anonymous accounts and other vehicles for international tax evasion but it is the large countries such as the United States and the United Kingdom instead that attract those looking for those services. Hines even suggests that the low tax rates available in IFCs contribute to a form of tax competition that increases the efficiency of tax policies elsewhere by distinguishing between highly mobile international investments that are very responsive to tax rate differences, and less mobile domestic, investments that large countries are able to tax at high rates.
“The findings of this research point to conclusions very different from those on which the concerns about IFCs are based,” he writes. “Virtually all of the complaints about IFCs appear to have little economic merit, with the evidence instead pointing to the benefits that IFCs confer on other countries. Far from eroding the tax bases of high-tax countries, there is evidence that IFCs improve the operation of the tax systems of high-tax countries, thereby contributing to their ability to raise tax revenue.”
Hines says that IFCs promote rather than depress economic activity elsewhere, but he says few people ever take the time to look at the evidence that favours offshore centres, and hence the tenacity of the opposite image. “Wading through this material can be a dreary business, which makes it understandable that many interested observers instead proceed on the basis of informed intuition together with snippets of anecdotal evidence,” Hines writes.
Citing the work of Jason Sharman, who approached service providers in 22 different countries about the possibility of creating shell corporations and anonymous bank accounts, he says Sharman failed to establish any in commonly identified IFCs but was successful in a number of onshore locations.
While Sharman was turned away in the Bahamas, the British Virgin Islands, the Cayman Islands, Dominica, Nauru, Panama, and the Seychelles, he found OECD countries, including the United States, the United Kingdom, Spain and Canada, to be very helpful in his enterprise. Hines argues that as the same approaches were used in each case and Sharman has full knowledge of when he was and was not successful, the evidence is powerful.
In his research Hines concludes that IFCs contribute to the operation of economies worldwide by stimulating foreign direct investment in high-tax parts of the world; disciplining financial markets in other parts of the world and promoting good governance and accountability. He also argues that the evidence indicates that IFCs contribute to financial development and stability in neighbouring countries, encourage investment, employment, and other aspects of business development in high-tax countries, have salutary effects on tax competition and enhance economic growth elsewhere.
“This evidence appears to be quite robust, and suggests a rather different interpretation of the IFC experience than some that appear from more casual readings of the history,” Hines says. He goes on to describe IFCs as pressure valves, assisting the policies of their high-tax neighbours by letting off economic steam when the pressure becomes too great. He also noted that no economic limits resulted in greater innovation, production and prosperity.
Likely to be music to the ears of those engaged in the argument to persuade the onshore OECD country’s of the merits of jurisdictions like the Cayman Islands, Hines says that the economic successes of international financial centres does not threaten the prosperity of other parts of the world but appears to enhance it.