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  • Writer's picturePavel Kohout

From Parkinson to Pandora

The Pandora Papers scandal has affected many of the world's politicians. In some countries, it has affected the balance of power. How did "tax havens" come about?

Tax havens are jurisdictions with low or zero rates of certain taxes (especially income taxes), with banking secrecy and with a certain necessary degree of political stability that promises to preserve these benefits. By this definition alone, it is clear that there was no need for tax havens around 1900. Indeed, this description more or less applied to all developed countries or their colonies. The British standard rate of income tax was 6 per cent. The U.S. federal income tax was not introduced until 1913, with the highest possible rate being 7 percent for incomes in excess of half a million dollars - a threshold then reached by few people in the entire country.

How did tax rates rise in such an incredible way that tax havens were needed? The answer is provided by the greatest British economist of the twentieth century: Cyril Northcote Parkinson.

You are probably at least superficially familiar with Parkinson's Laws. They are mistaken for a humorous genre when in fact they reflect deeply true observations about the behaviour of governments and other large organisations. Northcote Parkinson (a naval historian and novelist by profession) made copious use of choice British sarcasm and neglected the boring stuff like note-taking. This may have deprived him of the Nobel Prize in Economic Sciences, but it earned him considerable sums in royalties. So much so that he had to take refuge in a tax haven himself. But let's not get ahead of ourselves.

Parkinson's second law is "Expenditure rises to meet income". Few organisations, from the family to the state, can save money if their income rises. There will always be new needs that are "absolutely necessary". Sometimes the growth in income causes even faster growth in expenditure and debt is needed.

"Government revenues are historically tied to war," says Northcote Parkinson. During a war, a nation is able to mobilize all its resources because survival itself may be at stake. The war ends and we would expect spending to fall back to previous levels. This was true before, but not in the century of the welfare state. The Second World War did not end for Britain in 1945, but transitioned seamlessly into the War on Poverty, the building of the National Health Service and other amenities that were difficult to finance in the context of a national debt of around 250 per cent of gross domestic product. Then there were the smaller wars in Egypt, Malaya, Cyprus and Kenya fought to preserve at least part of a hopelessly disintegrating empire.

So it came to pass that in the 1950s it was impossible to earn legally more than about £6,000 a year in Britain. The tax liability of a taxpayer with an annual income of £100,000 was exactly £93,591 and 5 shillings! Plus excise tax, council tax, health and social security contributions.

"The basic method of tax avoidance is to-day, as it has been from the beginning, to leave the country." These words come from Parkinson's 1960 book The Law and the Profits. "Wealthy and distinguished men of British origin are thus to be found in Jersey, Tangier, Kenya, Bermuda, Tahiti and the Seychelles. Places of refuge for the taxpayer are territories where the tax burden is significantly less, where opportunities exist for investment or earning, and which possess a suitable agreement with Britain for the avoidance of double taxation. (...) This simple method of tax avoidance is open to all at the price of exile, and open to companies as well as to individuals. Much of the British merchant marine sails thus under Greek ownership and flies the brave, battle-torn ensign of Nicaragua or Panama."

Northcote Parkinson therefore moved from Singapore in the late 1950s to Guernsey, an island which, although owned by the British Crown, had (and still has) a pleasing 20 per cent personal income tax. It was only in 1986 that Northcote Parkinson moved to Britain, where he lived the last seven years of his life. He is buried in Canterbury, Kent.

Northcote Parkinson pointed out that lowering tax rates would not threaten or even increase the states' revenues. However, it was not until Margaret Thatcher's government that this was implemented. In the 1950s, Britain typically collected between 34 and 41 per cent of GDP in taxes; in the last ten years (including the 2021 estimate) it has been around 37 per cent. But before Thatcher came to power, high taxes managed to largely wipe out British industry. The car companies suffered a similar fate to Skoda Mlada Boleslav: they were sold to foreigners, mostly Germans.

An interesting side note: the Pandora Papers also include the Crown Estate, the company that manages the part of the British Crown property that is not the Queen's private property. (The property is owned by the Monarch in right of the Crown. This means that the Queen owns it by virtue of holding the position of reigning Monarch. Responsibility for managing The Crown Estate is trusted to the Crown Estate, and the Queen is not involved in management decisions.) The role of the Crown Estate is in the Pandora Papers is marginal, one might say negligible, but it does say something. Perhaps that British taxes are still too high.

Meanwhile, an international cartel agreement is emerging to significantly reduce tax havens. Are you looking forward to lower budget deficits? Probably in vain.

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