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In Trusts We Trust

Offshore Banking and Tax Havens Concept

Are tax havens immoral? The question is posed by Brooke Harrington’s extremely interesting book, Capital without Borders: Wealth Managers and the One Percent.  Harrington teaches at Copenhagen Business School in Denmark but qualified in wealth management to “infiltrate” the secretive world of the super-rich and the advisors who shield their wealth.

The book is cleverly written, raising large questions of justice through snippets of interviews Harrington conducted with wealth managers. The managers spoke to her about what they do for clients, and reflected on the morality of their own work.

The typical client of these managers—male, middle-aged, and in possession of over $30 million net—is primarily interested in the conservation of his wealth and its careful distribution to family. Discretion and a strong stomach are necessary because it is remarkably common for the manager to devise disbursements for the family, and for a second family, the secret children of a paramour.

There are roughly 170,000 high-net-worth individuals globally (defined as those with at least $30 million in investable assets). Almost all rely on tax havens to shield their wealth, against two main predators: government and spendthrift family members.

Capital without Borders covers three broad topics: the education and experience of managers; the history and character of the instruments used to protect wealth; and the broader ethical question of tax havens. These last two are closely linked.

Sundry accountants, lawyers, opera singers, and yacht crew members make up the ranks of wealth managers. Many live on the islands used for offshoring wealth: the Cook Islands, the British Virgin Islands, the Caymans, the Channel Islands, and so on. While some have the pedigree you might expect—British public school and Oxbridge—others have no university education. Nor is one strictly needed—until very recently, there was no special training one could take in order to become a wealth manager. Manchester University in England was the first to offer such a certificate and that was in 2011.

More than formal education, Harrington observes that what seems crucial to gaining entre into wealth management is what the social theorist Pierre Bourdieu calls “social capital”: a graceful physical bearing, engaging in the right recreational pursuits (sport shooting and hunting, polo, or sailing), manners, and knowledge about and ease around expensive things.

The instruments deployed to shield wealth are philosophically interesting. The trust is the preferred tool—though there is a need for others, because wealth and trust do not combine well in all cultures. The trust emerged in medieval England when knights leaving for the Crusades needed to secure their family wealth during long years of absence. Ecclesiastical courts were distinct from the state’s, and shrouding wealth in church law created onshore islands, so to say, independent of the Crown.

With the pervasive reach of the modern liberal administrative state, the capacity of a trust to escape government is viewed more skeptically. The medieval onshore island has mostly been housed offshore to make doubly sure prying fingers will not succeed in raiding the family coffers. The advantages provided by offshore islands are very low rates of taxation combined with vigorous impediments to legal challenges coming from abroad. The Cook Islands is one of the most remote places on earth, and even if lawyers make it out to this nation in the South Pacific, its government boasts that it has never acceded to a legal challenge to break a trust.

The masterstroke of the concept of the trust is to transfer the wealthy person’s legal ownership to a trustee, all the while ensuring that the original owner and his family are the sole recipients of the benefits of the property they relinquish into the hands of the trustee. For centuries, trustees were simply men of standing known to the family, amateurs who cautiously tended the trust aiming to conserve rather than grow its holdings. Though trustees today are mostly professional managers, they remain committed to conserving wealth rather than risking it in investments that could potentially yield a high return. Their charge is to ensure the property maintains itself and is able to make distributions for generations.

The umbrella professional association, the Society of Trust and Estate Practitioners, is based in London and was only founded in 1991. Its literature boldly affirms a strong libertarian stance that taxation is little better than thievery. This stance justifies leeching capital from nations and minimizing financial contributions to the common good.  Harrington observes that high-net-worth individuals almost always want to live in their country of origin and thus live the high life on the back of a common good to which they do not contribute.

Her point is deft, but blunted somewhat when we recall that Edmund Burke makes the concept of trust his guiding analogy for a healthy polity. Burke is skeptical of a politics of innovation and change. Alexis de Tocqueville marveled that in America, wealth “circulates with inconceivable rapidity,” and Franklin D. Roosevelt lambasted “fortunes by will, inheritance, or gift” as inconsistent “with the ideals and sentiments of the American people.” Burke, however, compares a strident call for change and progress to a volatile gas breaking loose. Liberty in a mass of persons is power, he argues, and power unrestrained by established order is bound to be abusive.

The trust offers the right model for combining the claims of establishment and the need of a polity to respond to historical change and new mores. As Burke said, the trust

leaves acquisition free; but it secures what it acquires. Whatever advantages are obtained by a state proceeding on these maxims, are locked fast as in a sort of family settlement; grasped as in a kind of mortmain forever. By a constitutional policy, working after the pattern of nature, we receive, we hold, we transmit our government and our privileges, in the same manner in which we enjoy and transmit our property and our lives.[1]

Harrington writes that just 0.7 percent of the global population owns 41 percent of assets worldwide. That is staggering; but Burke asks us to carefully consider our egalitarian intuitions. His politics, what he calls “the method of nature,” is rooted in an analogy to the rhythm of the family. Rather beautifully, he writes:

In this choice of inheritance we have given to our frame of polity the image of a relation of blood; binding up the constitution of our country with our dearest domestic ties; adopting our fundamental laws into the bosom of our family affections; keeping inseparable, and cherishing with the warmth of all their combined and mutually reflected charities, our state, our hearths, our sepulchres, and our altars.[2]

To rectify the inequality of inherited money, it would be necessary to break the trust. But this would be no mere overhaul of state revenue. It would be a body blow to the family as a stabilizing and generative force in the nation, and would radically advance and cement the totalizing tendency of the modern administrative state. Tax havens might not be the best things about the world, but Burke clarifies why the trust is a profound invention of the Middle Ages and one best left alone.

[1] Edmund Burke, Reflections on the Revolution in France (Liberty Fund, 1999), p. 122.

[2] Ibid.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on June 30, 2017 at 09:36:26 am

[…] Over at the website Law and Liberty you’ll find my short essay on tax havens (http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/). […]

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Image of The financial reality behind haute couture - Veneration & Refinement: The Ethics of Fashion
The financial reality behind haute couture - Veneration & Refinement: The Ethics of Fashion
on June 30, 2017 at 11:54:49 am

Thank you for this. It has intersections with a volume on Law and Philanthropy we did for Conversations on Philanthropy a few years ago. I'm curious whether the author takes up the important issues surrounding the rule against perpetuities, which does set limits on dead hand control of wealth.

The invocation of Burke's invocation of trusts as a model for constitutional continuity and preservation may need to take account as well of this complex issue of perpetuities. Jefferson's thought that the Constitution must belong to each generation seems to take more seriously this dimension of trust law. The aversion of continual constitutional revolution would seem to require some principles of constitutional perpetuity. And this is the ground of the debate in which we are locked over Originalism and the Living Constitution. Between these positions, however, would seem to be possible a philosophy of intelligent preservation and gradual reform warranted in some fashion through the participation of citizens. Interestingly, this would likely require reconsideration of birthright citizenship in favor of some form of elective citizenship requiring citizens to not merely subscribe to Constitutional principles but also to become responsible trustees for the preservation and improvement of their Constitutional endowments. Fascinating possibilities.

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Lenore Ealy
on July 01, 2017 at 11:18:19 am

To rectify the inequality of inherited money, it would be necessary to break the trust. But this would be no mere overhaul of state revenue. It would be a body blow to the family as a stabilizing and generative force in the nation, and would radically advance and cement the totalizing tendency of the modern administrative state. Tax havens might not be the best things about the world, but Burke clarifies why the trust is a profound invention of the Middle Ages and one best left alone.

Oh, please. What conclusions should we draw about the family as a stabilizing and generative force prior to the Middle Ages, or in nations that don’t recognize trusts?

Indeed, these trust are quite stabilizing. They cement the status of the rich as rich, and decrease social mobility. If that’s what you value, I can’t say I’m surprised that you’d laud off-shore tax dodges. Why you would imagine that anyone else would embrace this argument, I can’t imagine.

That said, perhaps the appropriate remedy for off-shore trusts is to adopt the X Tax, or progressive consumption tax, along with strong estate and gift taxes.

Note that the government brought down Al Capone by comparing his consumption to his reported revenues. Maybe there’s a moral here: For tax purposes, treat everyone as a renter, and tax them according to the market value of the goods and services they consume—but at a progressive rate. I suspect this would be administratively challenging. But it’s not as if the current tax code is easy. And any consumption-base tax code would reduce the disincentive to earn that our current income-tax code creates.

We’d still face the challenge of national boundaries: A rich person could still maintain real (not paper) assets in tax havens, soak up the benefits of those assets, and remain beyond the taxing power of his home country. But then tax havens would have to actually HAVE assets, not just an office building with a million addresses. And the price of those assets would increase as more, and richer, people competed to own them. This would help reduce the allure of tax havens.

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nobody.really
on July 01, 2017 at 13:45:08 pm

nobody:

Your arguments are somewhat valid BUT:

A more basic question:

What business is it of yours that someone chooses to "protect" his or her assets?
Is there an underlying envious resentment here.

So the rich are rich - so long as the monies have not been ill-gotten, what the hell do you or I have to say in the matter? - unless, of course, we have some other motive or *goal* in mind, i.e., "how to better spend that persons assets in pursuit of some newly defined "Public Good."

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gabe
on July 02, 2017 at 08:49:59 am

Gabe is correct. Whose wealth is it anyway? Direct taxation,whether income taxation or inheritance taxation is a direct assault on not only property rights but also the right to privacy. Once the socialist idea takes root that all wealth belongs to everyone and that if someone owns more than their "fair share" of "the wealth" then it is somehow "fair" that the state should step in and "equalize" the situation. And how is this concept to be enforced? With violence if necessary. In addition the question to ask is not what method is "fair" or expedient in the collection of taxes but what are the taxes to be used for? Why should successful people and their offspring be penalized into paying for functions of government that the government has no right to be involved in in the first place? Over 90% of the Federal Budget is transfer payments,unconstitutional wars and interest payments on unsustainable debt. Basically a corruption of our Constitutional Republic. Why should successful people be penalized for supporting corruption? In fact I would say that the most patriotic thing a successful person could do would be to keep as much of their hard earned wealth away and out of the hands of a corrupt, bankrupt government that does more harm then good.

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libertarian jerry
on July 02, 2017 at 20:54:32 pm

In fact I would say that the most patriotic thing a successful person could do would be to keep as much of their hard earned wealth away and out of the hands of a corrupt, bankrupt government that does more harm then good.

Why just "successful" people? Why not everyone? Let's all pay no taxes!

And let's review the history of nations that have no revenues. It won't take long, 'cuz there aren't many. Basically we're talking about pre-nationhood Germanic tribes.

Look, my tax reform proposals are fairly idealistic all by themselves; I have little time for libertarian fantasies.

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nobody.really
on July 02, 2017 at 21:34:11 pm

Where is the fantasy in that the American Federal Government is bankrupt,it's currency is becoming worthless,our National Debt is unsustainable and unpayable and future generations have been tied to debt bondage for life. If you have someone with an open checking account and an open credit card that squanders and wastes the built up wealth of generations isn't time to close out that checkbook and cut up that credit card? This is one of the reasons that the Founders of our Nation put into the original Constitution the "no direct taxation" clause. America ran fine without an Income Tax for over 130 years. Since it's implementation we have had nothing but warfare,welfare and waste that has bankrupted our nation. America could run fine with indirect taxes and tariffs. I'm not talking about "no taxes." I'm talking about direct taxation in the guise of Income and Inheritance taxes. To tax someone directly makes that person a slave. And slavery isn't a fantasy it's a reality.

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libertarian jerry
on August 20, 2017 at 20:55:05 pm

[…] A little while ago over at the Law & Liberty website, I published a moral analysis of trusts. In the background was a wish to flesh out the moral character of high fashion. I do not know the percentage but I presume almost all haute couture is bought with monies disbursed from offshore trusts. Alta Moda Dolce & Gabbana dresses start at $40,000 US. It is only the hyper wealthy who can buy most haute couture and much of their wealth is housed in trusts, and many (maybe most) of these trusts are off shore (http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/). […]

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Image of Aquinas and Kant on fashion's dirty linen - Veneration & Refinement: The Ethics of Fashion
Aquinas and Kant on fashion's dirty linen - Veneration & Refinement: The Ethics of Fashion
on September 02, 2017 at 15:59:25 pm

[…] It might seem that tax havens are obviously immoral but elsewhere I have shown that Edmund Burke gives good reasons to be very wary of breaking trusts (http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/). […]

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Image of Weddings and trusts - Veneration & Refinement: The Ethics of Fashion
Weddings and trusts - Veneration & Refinement: The Ethics of Fashion
on November 03, 2017 at 20:58:13 pm

[…] Tax havens are not obviously immoral.  Please see my post at: http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/ […]

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Image of Dressing UHNWIs: Dolce & Gabbana - Veneration & Refinement: The Ethics of Fashion
Dressing UHNWIs: Dolce & Gabbana - Veneration & Refinement: The Ethics of Fashion
on July 12, 2018 at 08:47:10 am

[…] As always with couture, Burke approves.  Somewhat, he also approves of the financial instruments that make it possible: http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/ […]

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Image of Continuing lure of tradition in fashion - Veneration & Refinement: The Ethics of Fashion
Continuing lure of tradition in fashion - Veneration & Refinement: The Ethics of Fashion
on July 21, 2018 at 11:43:21 am

[…] A significant reason is because most wealth is now literally over the seas, legally protected by various islands.  Luxury fashion — and couture, especially — is paid for by these legal protections.  I argue that tax havens are not obviously immoral: http://www.libertylawsite.org/2017/06/30/in-trusts-we-trust/ […]

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Image of Tight connection between luxury and tax havens - Veneration & Refinement: The Ethics of Fashion
Tight connection between luxury and tax havens - Veneration & Refinement: The Ethics of Fashion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.