Tax Choices

As a law school professor in the United
States, I teach courses on US tax law as well as on the history and development
of offshore financial centres. When teaching the latter, I’m frequently
reminded of US law students’ perception that the taxation of income is a global

During the first few months of every
year, US citizens and residents become preoccupied with the ritual of
collecting W-2 forms from employers (indicating how much income tax was
withheld from their paychecks during the year) and 1099 forms from banks and
other payors (indicating how much non-salary income was received by the
resident during the year on which tax must be reported and paid). We grouse
about the time we spend preparing federal, state and local tax returns or the
money we pay an accountant or professional tax preparer if we choose not to
prepare them ourselves. Then, once we’ve calculated the tax due on our income
for the year, we either enthusiastically plan how we’ll spend the refund we’re
due if too much tax was withheld or complain bitterly if too little tax was
withheld and we have to write a check for the balance owed to the US Treasury. 

Given the prominent place of the income
tax in US culture, it’s not surprising that law students in my OFC courses find
the absence of income taxation in offshore jurisdictions to be so . . . well,
foreign. Perhaps it’s also why they are prepared to buy into the OECD’s
portrayal of OFCs as parasitic regimes engaged in a tax competition “race to
the bottom”. There is a common misperception in the United States that OFCs
intentionally abandon income (or “direct”) taxation in order to poach tax
revenue from onshore jurisdictions. In fact, the development of any country’s
tax system is influenced by a combination of factors including its political
system, its economy and even its geography. For example, in terms of territory,
population and economic activity, OFCs are relatively small.

The combined
landmass of the 41 countries the OECD identified as tax havens in 2000 is less
than that of New Zealand – as is their combined gross domestic product. Thus,
OFCs need relatively less tax revenue to fund government operations. In
addition, because most OFCs are located on islands or are otherwise
geographically isolated, they are able to effectively patrol their territorial
borders. This means that for most OFCs, import duties and similar levies are a
far more efficient means of extracting the fiscal resources necessary for
government than a system of income taxation, with its printing, reporting,
auditing, recordkeeping and enforcement requirements. 

Although income taxation is anathema in
most OFCs, it is the value-added tax that is abhorred in the United States. At
first glance, opposition in the United States to implementing a VAT is
puzzling. In the European Union, the VAT has generated something like 30 per
cent of total tax revenues, and most other developed countries around the world
rely on the VAT for a substantial portion of their tax revenues. But just as
most OFCs have rejected income taxation for practical reasons relating to their
unique circumstances, US reluctance to adopt a VAT may be similarly explained.
Like an income tax, a VAT requires significant administrative and enforcement
resources. Installing a VAT in addition to the existing US income tax would
substantially expand a tax system that many view as too large already.
Moreover, in many respects a VAT replicates a retail sales tax. Under the US’s
federal system of government, sales taxes historically have only been imposed
by state and local governments.  

Despite its discomfort with the VAT, the
United States may be forced to seriously consider implementing one in order to
raise revenues to offset the trillion-dollar annual budget deficits projected
for the next several years. By the same token, despite their discomfort with
direct taxation, some OFCs may be forced to seriously consider adopting an
income tax in order to deal with their own revenue shortfalls. The two-island
federation of St Kitts and Nevis (which already has the highest VAT in the
region) reportedly is contemplating the reintroduction of a personal income tax
in order to reduce a ballooning national debt that has drawn the attention of
the International Monetary Fund. Similarly, the recently installed British-led
government in the Turks and Caicos proposes to replace that country’s work
permit fees with an income tax on wages that will be paid by employers. 

The point here is that taxes are taxes –
whether of the income, duty, or VAT variety. Countries impose the forms of
taxation that work best given their unique circumstances and may adopt
different forms when faced with fiscal crisis. However, a choice to forego a
particular form of taxation should never be met with condemnation from other

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Craig M. Boise

Craig’s research, writing and teaching focus is on US international tax policy, offshore financial centres, and offshore financial intermediation. 

Craig M. Boise
Dean Designate and Professor of Law 
Cleveland State University 
2121 Euclid Ave. LB 138 
Cleveland, OH 44115 

T: +1 (216) 687-2300
E:  [email protected]

Cleveland State University

In order to prepare students for a professional career with unlimited potential, we have created an educational environment that is not confined within the four walls of our law building. In addition to a contemporary curriculum, which includes a rigorous legal writing program, we offer joint-degree programs, several clinical programs, externships, two student-edited journals, a moot court team that regularly wins competitions across the country, and a Russian Studies Program with a Summer Law Institute in St. Petersburg, Russia. Our students coordinate 19 student organizations, and they also demonstrate a commitment to community service by volunteering in our Pro Bono Program, which provides free legal services and counseling to needy clients and underrepresented groups.

We have a student body that is diverse in experiences and motivations. We have an accomplished faculty—men and women who are dedicated to teaching, scholarship, and mentoring. We have exceptional administrators and staff—people who are committed to serving our students, our faculty, our graduates and our community. And we have a great facility, including a law library that is one of the finest in the country.  In addition, we have an entirely new entrance with much more student social and study space.


Cleveland State University 
2121 Euclid Ave. LB 138 
Cleveland, OH 44115 T: +1 (216) 687-2300
E:  [email protected]