The critical importance of the Cayman Islands to the U.S. economy

In May of 2012, and soon before Facebook’s IPO, Eduardo Saverin renounced his U.S. citizenship. Saverin was a co-founder of the social-networking site, and the consensus was that he gave up his citizenship to avoid U.S. taxes that would be levied after the offering. 

Saverin was widely denounced for his decision. So incensed was Senator Chuck Schumer over Saverin’s allegedly “despicable” act that he introduced legislation meant to impose a 30 percent tax on investments of Americans who would be so rude as to shun its political class. Though it was highly debatable whether the Brazilian by birth Saverin could shield much of his Facebook gains to begin with, the presumption that he might be able to reduced him to “traitor” status in the eyes of politicians, and the media who enable them.

Looked at from a purely economic perspective, it should be said to the extent that Saverin succeeded in reducing his tax bill, he did the U.S. economy a great turn. From a simple freedom perspective, it’s fair to say that Saverin’s decision was rather heroic.

Lest we forget, when the rich save or “hoard” their money in bank accounts, the banks that take their deposits immediately turn the savings into loans that fund our consumption, our student loans, and provide us with the seed capital to start a business. Short of stuffing money under a mattress, to hoard wealth is to redistribute it – by definition.

Assuming Saverin were to place his wealth with J.P. Morgan, Goldman Sachs, or some other financial institution known to invest the wealth of the superrich, those institutions don’t sit on the money either. They’re paid a fee in return for putting the money to work, so any bounty shielded from the federal taxman by the rich is wealth that very quickly reaches an existing business eager for growth capital, or a new business seeking start-up funds.

One logical reply is that as Saverin moved to Singapore, he might convert the vast majority of his dollar wealth into Singapore dollars. Fair enough, but to achieve such a conversion he would have to exchange his dollars with an individual or institution desirous of his U.S. dollars. If so, much the same scenario would take place. The buyer of Saverin’s dollars would have to put them to work, or in a bank, and the result would be much the same as if Saverin himself had banked or invested his billions.

It’s also true that Saverin could have done nothing, and simply written a massive check to the federal government. If so, the private economy where all wealth is created would have had reduced access to the capital necessary to grow.

Some might argue that the federal government could invest the money, but as logic dictates, the waste of Saverin’s gains would be quite gruesome. The latter truth goes well beyond one’s ideology. The simple truth is that the federal government could be staffed by the most libertarian of politicos, but the money would still be wasted, because government, despite protests otherwise, is not in the position to act like a business.

Whereas businesses in the private sector face collapse on a daily basis due to the possibility that investors will lose faith in their management style, government doesn’t operate under such strict discipline.

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When government spending fails in its stated goal, there’s no investor in place to force a rethink, or to pull funding altogether. Instead, and thanks to the relentless flow of taxpayer dollars into government coffers, spending on that which doesn’t work and which hasn’t been tested by market forces continues ad infinitum.

Saverin’s ability to shield some of his wealth from the outstretched hands of politicians is a reminder of the critical importance of the Cayman Islands to the U.S. economy. Though it’s defined in pejorative terms by politicians and pundits as an “offshore tax haven” utilized by the rich to shield their wealth from supposedly angelic politicians eager to use it in order to fix the world’s myriad ills, the existence of locales like the Cayman Islands, in fact, makes it more likely that the very economic growth essential for prosperity and the curing of our many ills will reveal itself.

To see why, we need only consider what happens when wealth is deposited at financial institutions located in the Cayman Islands. Though politicians and pundits view the latter as immoral, whereby wealth is “taken” from the United States only to be stranded offshore, the actual truth is something reasonable thinkers should embrace with great gusto.

Much like with the example involving Saverin, Cayman banks don’t pay individuals and corporations for the dollars they deposit so that they can stare longingly at them. By virtue of paying for those deposits, they’re immediately redirecting the wealth toward individuals and businesses that require the funds to expand existing operations, or to turn entrepreneurial ideas into actual concepts.

Missed by the critics of offshore tax havens is that wealth never lays idle. In that case, wealth that can be shielded from the greedy hands of politicians on the way to a home in Cayman is most often reinvested in U.S. commercial concepts deemed worthy by the island’s wise financial minds. Put more plainly, a dollar deposited in a Cayman Islands bank is a dollar soon redirected to company and job-creating ideas in the U.S.; the only difference being that American politicians don’t acquire for themselves a substantial portion of the funds on deposit.

That the above is true cannot be minimized. To paraphrase the great Austrian economist Joseph Schumpeter, there are no entrepreneurs without capital. The existence of locales like the Cayman Islands, which treat capital with high regard, means that more capital is being made available to market-disciplined entrepreneurs as opposed to wasteful politicians.
 

And as evidenced by capitalism’s brilliant track record of turning the obscure luxuries of the rich into commonplace goods, not to mention its success at curing what ails us, we’re all better off in the U.S. and around the world thanks to offshore tax havens.

The genius of tax havens like the Cayman Islands doesn’t begin and end with the undeniable good that comes from market forces existing as the driver of capital allocation. The light tax system that Cayman embodies quite simply keeps U.S. politicians honest.

Those who decry the existence of tax havens perhaps haven’t thought about what the world would be like without them. Too often forgotten is the importance of competition. Applied to governments, that there are places in the world where capital is treated reverentially and where earnings aren’t taxed means that countries that impose excessive duties on their citizens face the very real possibility not just of capital outflows, but also the departure of human capital.

Thinking about this in dollar terms, it can’t be forgotten that 2/3rds of all U.S. dollars have a foreign address. So while it’s well understood that the “foreign address” of U.S. dollars is often a bank located in New York that intends to lend the funds within the 50 states, it’s also true that dollar-denominated investment animates global economic activity.
 

This is of essential importance, given the happy economic truth that dollars deposited in Cayman banks don’t necessarily have to be invested in the U.S. Cayman financiers can direct them well outside the U.S. if the latter is seen as not particularly welcoming to investment. That capital is mobile in this way ultimately redounds to American citizens for it forcing the country’s political class to fix policies viewed by investors as capital repellents.

Concerning human capital, much the same applies. It’s important that not just Americans, but individuals from around the world, have options when it comes to escaping personal and economic tyranny. Absent the welcoming stance of the Cayman Islands toward talent, governments could much more easily treat the individuals who drive all economic advancement with much greater disdain.

And then there’s the increasingly unctuous federal oversight of bank deposits in the U.S. The heavily regulated U.S. banking system is required by law to report all bank withdrawals greater than $10,000. Americans learned about this in much greater detail with the recent indictment of former House Speaker Dennis Hastert. Without knowing whether or not Hastert attempted to withdraw $3.5 million in order to hide a criminal act, the scary reality is that the federal government wasn’t tracking Hastert’s withdrawals in hopes of exposing any alleged sexual misconduct.

That such banking laws exist is rather horrifying. Just as we’re not all angels in the private sector, it’s similarly true that government doesn’t always employ the well-intentioned. In possession of this kind of information, there’s no telling what government officials could do with it. Reputations and careers could be destroyed by such snooping.
 

That this is possible, not to mention that Hastert himself may well have his reputation wrecked by an excess of government power over U.S. banks, is yet another endorsement of locales like the Cayman Islands.
 

The federal government, particularly in the U.S., exists to protect the rights of its citizens, not to increase its power over them. Without the ability to move wealth outside of U.S. regulations, Americans would have very little recourse should federal oversight of banks increase even more. That there’s a non-U.S. option for wealth provides Americans with important leverage over a federal government that has grown too powerful.
 

All of this speaks to the critical importance of the Cayman Islands, not just to the U.S. economy, but to the global economy. That this island nation treats capital well means there’s more of it for the entrepreneurs of today and tomorrow, that legislators face essential tax and capital competition, but also that there will be limits to government tracking of capital flows. To put it as plainly as possible, we would have to invent the Cayman Islands if it didn’t already exist.

John Tamny is Political Economy editor at Forbes, editor of RealClearMarkets, and author of the new book “Popular Economics: What the Rolling Stones, Downton Abbey and LeBron James Can Teach Us about Economics.”
 

 

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Michael Klein
Michael Klein Editor Pinnacle Media Group Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: mklein@pinnaclemedialtd.com Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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Cayman Financial Review is the only magazine which promotes the Cayman Islands financial services industry at a local and international level. Produced by Cayman’s leading printing and publishing company Pinnacle Media Ltd, the Cayman Financial Review is published quarterly and is distributed in print and online to organisations and associations worldwide as well as at key financial conferences.

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