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Cayman Report Rejects Direct Taxation

Thursday, March 4, 2010

An academic report examining the fiscal challenges facing the Cayman Islands has rejected the UK government’s recommendation that the Caymans should introduce direct taxation to solve its financial difficulties. Noting the effects historically of high taxation on the UK economy, the report’s author has urged the Cayman government to retain its low-tax approach and instead target public spending.

The report, compiled by Richard Teather, a senior lecturer in taxation, unequivocally rules out the introduction of direct taxation without first ensuring public sector expenditure is balanced in relation to an island population of around 50,000 people. The Cayman Islands has solely relied on indirect taxation throughout its 200-year history.

The report was commissioned by Cayman Finance (formerly The Cayman Islands Financial Services Association) a body representing the leading financial and business firms and organisations in the jurisdiction's financial services sector. It is intended that the report will assist the deliberations of the Miller Commission, which is scheduled to be published in the near future.

The key points in The Teather Report are:-

  • High taxes damage economies;
  • The UK was severely damaged by high taxes in the 1970s;
  • The UK and US benefited from lower taxes through the Thatcher/Reagan reforms of the 1980s; and
  • New Zealand and Ireland thrived under low taxes in the 1990s;

Teather highlights the enormous discrepancy between Hong Kong and the UK in the 1970s, when the UK had a basic tax rate of 35% and a top rate of 98%, Hong Kong kept its low taxes and thresholds. While the UK’s economy grew by only 175% in the period 1950-1999, Hong Kong’s growth was a remarkable 800% even allowing for inflation.

Teather goes on to point out that in fact increasing taxes hurts workers and will reduce not increase private sector jobs although they increase public sector jobs. He says that if a business’s taxes are raised there are only three options for whom to pass the cost on to:-

  • Owners and investors, through lower profits, lower dividends;
  • Customers, through higher prices; or
  • Employees, through lower wages or redundancies.

“The pain of tax rises on business therefore ends up falling on the workers,” Teather observes.

Teather’s view is that the ability for institutional and private client funds to pool funds in a tax neutral environment has been an important element in the development of the financial services industry and notes the success of the indirect taxation method that has been used in Cayman to date.

The report rules out debt finance as an ongoing solution because, in the long term, this would be highly damaging to the Cayman Islands’ reputation as a place to do business.

The report goes on to highlights the fact that government spending in the Cayman Islands is “totally out of line with its peers, having far higher levels of public spending than any other comparable jurisdiction.”

Statistics produced in the report show that the Cayman Islands has more than double the government spending per head of population than the average level for comparable countries.

Commenting on the Teather report, Anthony Travers, Chairman of Cayman Finance said: “Our Premier McKeeva Bush is already well aware that public sector expenditure presents the gravest financial problem facing the islands. This is not a problem of Mr McKeeva Bush’s making. Many must shoulder the responsibility, but it is something he must address without further delay.”

“In our government’s defence I would say that at least we have realized the scale of the problem unlike the UK government which has not. The UK trillion pound public sector obligations are not even on the balance sheet. Despite the talk of regulation and prudent fiscal management the accounting treatment shows that little has been learned in the UK from the financial crisis. Now that the true nature of the problem has been identified in Cayman we encourage and support government undertaking immediate remedial action and in good time.”