Tax Evasion and Tax Havens since the Nineteenth Century 3031181182, 9783031181184

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Tax Evasion and Tax Havens since the Nineteenth Century Edited by

sé b a s t i e n gu e x h a dr i e n buc l i n

Tax Evasion and Tax Havens since the Nineteenth Century

Sébastien Guex · Hadrien Buclin Editors

Tax Evasion and Tax Havens since the Nineteenth Century

Editors Sébastien Guex Department of History University of Lausanne Lausanne, Switzerland

Hadrien Buclin Institute of Political Studies University of Lausanne Lausanne, Switzerland

ISBN 978-3-031-18118-4 ISBN 978-3-031-18119-1 (eBook) https://doi.org/10.1007/978-3-031-18119-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

This collective work aims to shed light on a history that is still largely unknown, that of tax evasion and tax havens, since their rise in the nineteenth century. Since the 2008 financial crisis, the issues of tax evasion or avoidance—and of tax havens—has gained increasing prominence in public debate and has led to the publication of a vast amount of academic literature. However, there is little research on the secular history of this phenomenon. The following introduction, by Sébastien Guex, offers some explanations for this gap. It also proposes a new periodisation of the phenomenon, which shows that it has its roots well before the First World War, as well as a new conceptualisation that emphasises the notion of tax predator. The book is then organised into three thematic parts. The first part (seven chapters) examines the emergence and expansion of tax havens during the nineteenth and twentieth centuries. This section also outlines a typology of tax havens. This includes not only offshore financial centres, investment hubs, transit countries, or conduit countries but also the littleknown reality of freeports. This question also leads to a reflection on the competition between tax havens, for example, the Belgian and Swiss tax havens, on the eve of the First World War. This competition includes tax evasion by wealthy, often mobile individuals, as well as by large companies. The contributions on this subject will shed light on the strategies

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implemented by states to attract them to their territory, for example, through tax exemptions for rich foreigners or through freeports. Several chapters also confront the difficult question of estimating tax evasion and its evolution over time, a problem that has been addressed only fleetingly by historians. From this point of view, several contributions mobilise unpublished data, as well as long statistical series. The second part (four chapters) studies the evolution of the volume of tax evasion from a historical perspective. It examines the causes of tax evasion, but also the social and political conflicts it has caused, particularly in tense contexts such as world wars or economic crises. Thus, several contributions will question the impact of the great labour and socialist struggles in Europe after the First World War on the debates around tax evasion. The development of the tax system and its tax control efforts are also examined from the perspective of the political struggles they have generated. Finally, the third part (five chapters) examines public authorities’ fight against—or rather complacency towards—tax evasion. It shows how the reaction of the authorities can vary greatly, depending not only on social and political power relations but also on the financial needs of the states, for example, in a post-war reconstruction context. The chapters highlight a wide range of state responses, from high tolerance to prison sentences, as well as various measures to promote taxpayer morale. The problem of understaffed administrations and other forms of helplessness in the face of the complex legal arrangements implemented by some tax evaders is also examined. This illustrates the importance of the actual tax practices of administrations beyond the study of the legal framework alone. This publication should be seen as a step towards a better understanding of the history of tax havens as a phenomenon organically linked to capitalist globalisation. The two editors are fully aware of the limitations of this publication, particularly in terms of geography, where regions such as Asia, which is so important in the recent development of tax havens, occupy a small part of the picture. We hope that the fact of having brought together some twenty authors around this decisive issue for the understanding of the contemporary world will stimulate new research. This book is the result of a conference organised by the two publishers at the University of Lausanne and held online in June 2021. It provided an opportunity to discuss the contributions published in this volume.

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Both editors would like to thank the participants for the richness of the discussions on this occasion, and the staff of Palgrave, in particular Lucy Kidwell, for the trust they have placed in us and their support during the preparation of this book. Lausanne, Switzerland

Sébastien Guex Hadrien Buclin

Contents

1

Introduction. “Low-Tax Predators” Rather Than “Tax Havens”: New Perspectives on the History of the International Tax Evasion and Avoidance Market Sébastien Guex

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Part I Emergence and Expansion of Tax Havens 2

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The Emergence and Expansion of Tax Havens, 1850–2000: Insights from a New Dataset Sébastien Laffitte Emergence and Expansion of the Swiss Tax Haven: The Tax Privileges for Rich Foreigners in the Canton of Vaud, 1840–1959 Vivien Ballenegger Emergence of, and Threats to, the Belgian Tax Haven During La Belle Epoque, 1890–1914 Simon Watteyne The Oil Multinational Shell’s History of Using Tax Evasion Methods, Including Tax Havens and Political Pressure, 1914–1974 Tijn van Beurden

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Swedish Emigration to Switzerland in the 1960s–1980s Period: Tax Exile and Settlement Choices Thibaud Giddey and Mikael Wendschlag

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The Rise of Tax Havens and Conduit Countries from the Early 2000s Arjan Lejour

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Luxury Free Ports as Purpose-Built Conduits for Tax Evasion, 1990–2020 Chloe Fyfe

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Part II Tax Evasion: Extent, Causes, and Conflicts 9

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Income Tax Evasion and Avoidance in Germany, 1850–1920 Marc Buggeln Volume, Social Distribution, and the Instrumentalisation of Tax Evasion in Switzerland: The Case of Zurich, 1860–1945 Sylvain Praz

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War Profits and Tax Evasion: Italian Fiscal Policies in the First World War and After the War, 1915–1924 Fabio Ecca

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Tax Compliance in a Crisis: Evidence from the Great Depression, 1929–1936 Sacha Dray

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Part III Fighting Tax Evasion and Tax Havens? 13

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Criminalising Tax Evasion in France, Early Nineteenth Century–2008 Katia Weidenfeld “These Patriots Who Misuse the Law”: The Background to the United Kingdom’s Anti-Tax Haven Legislation of 1936 James Hollis

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Tax Evasion as Seen by French Tax Administrations from the 1920s to the 1970s: Pragmatism in Action Béatrice Touchelay

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Detecting Ordinary Tax Evaders: The Example of the 1945 National Solidarity Tax in France Isabelle Rabault-Mazières

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Tax Education After WWII: How Spain, the USA, and West Germany Tried to Make Their Citizens Pay Honestly Korinna Schönhärl, Nasrin Düll, and Nadya Melina Ramírez Lugo

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Index

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Editors and Contributors

About the Editors Sébastien Guex is Full Professor of History at the University of Lausanne, Switzerland. His research interests lie in social, economic, and political history. He has been working for decades on public finance, taxes, and tax havens, in particular the Swiss tax haven. Among his numerous publications on these issues, one should mention L’argent de l’Etat. Parcours des finances publiques au 20ème siècle (Lausanne: 1998), La Suisse dans la constellation des paradis fiscaux (Lausanne/Geneva: 2002), as well as numerous articles, for example, ‘The Origins of the Swiss Banking Secrecy Law and Its Repercussions for Swiss Federal Policy’, Business History Review (vol. 74, Summer 2000, pp. 237–266) or ‘The Emergence of the Swiss Tax Haven, 1816–1914’, Business History Review (vol. 95, Summer 2021, pp. 1–20, https://doi.org/10.1017/S00076805200 00914). He is currently writing a book on Switzerland’s role as a major player in the international tax evasion market that developed between the beginning of the nineteenth century and the First World War. He has also directed several doctoral theses in these fields, which were subsequently published, including Yves Sancey, Quand les banquiers font la loi. Aux sources de l’autorégulation bancaire en Suisse et en Angleterre de 1914 aux années 1950 (Lausanne: 2015) or Christophe Farquet, La défense du paradis fiscal suisse avant la Seconde Guerre mondiale: une histoire internationale (Neuchâtel: 2016). He has recently led research project funded

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by the Swiss National Science Foundation entitled ‘The Antechambers of H(e)aven? Tax Laws and Tax Practices of the Swiss Cantons 1870–1974’, which focuses on the history of taxation in the Swiss cantons and the role of their tax competition in the birth and development of the Swiss offshore centre. He is also a member of the federal commission in charge of the publication of the Diplomatic Documents of Switzerland series. Finally, he is one of the founders, in 2002, of one of the most influential NGOs on tax policy at the international level, the Tax Justice Network (TJN). Hadrien Buclin is a part-time Lecturer at the University of Fribourg, Switzerland, and, since June 2023, researcher at the Institute of Political Studies of the University of Lausanne. He was also, in 2017–2019, a visiting research fellow at Paris 1 University and, in 2019–2022, a senior researcher at the History Department of the University of Lausanne. His research focuses on the history of Switzerland in the twentieth century. He is the author of Les intellectuels de gauche: critique et consensus dans la Suisse d’après-guerre (1945–1968) (Lausanne: 2019). He is currently writing a book on Swiss social democracy, economic crises, and the rise of neoliberalism in the 1970s to 1990s. More recently, he has developed a field of research devoted to the history of taxation in Switzerland; he coedited on this subject with Sébastien Guex: La fiscalité directe des cantons suisses. Législations et pratiques aux XIXe et XXe siècles (Basel: 2022) and wrote a chapter in this book on the introduction of wealth tax and tax evasion in Geneva after the First World War.

Contributors Vivien Ballenegger is a Ph.D. candidate at the University of Lausanne. His dissertation focuses on the history of taxation in the Swiss cantons of Bern and Vaud between the mid-nineteenth and mid-twentieth centuries. His article ‘Imposer les successions pour réduire les inégalités? Le cas du canton de Berne, 1852–1919’ (2021) presents the history of inheritance taxation in the canton of Bern and discusses the social and political origins of its main reforms. His other article, ‘Les stratégies du patronat bernois pour limiter la contribution fiscale des sociétés, de 1918 à 1945’ (2022), describes the broad fiscal resistance and offensive of the Bernese employers, which resulted in the reduction of their tax burden.

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Tijn van Beurden is a private scholar. His research subjects are the history of tax avoidance and tax havens. He obtained his Ph.D. degree from the University of Amsterdam in 2018, on a thesis titled The Curaçao Offshore: Origin, Growth and Decline of a Tax Haven, 1951–2013. This thesis demonstrates that the offshore activities on Curaçao were an attractive but vulnerable source of government income. His last publication was together with J. Jonker: ‘A perfect symbiosis: Curaçao, the Netherlands and financial offshore services, 1951–2013’ in the Financial History Review of 14 January 2021. This article demonstrates how Curaçao offshore was prompted by Dutch initiatives, boosted by Dutch multinationals and service providers, and supported by Dutch foreign policy throughout. Marc Buggeln is Assistant Professor at the Friedrich-Meinecke-Institute at the Free University Berlin and Privatdozent at the History Department at Humboldt-Universität zu Berlin. From 1 October 2021 to 30 September 2022, he was substituting this professorship for Social, Economic, and Technological History at Helmut Schmidt University/University of the Armed Forces in Hamburg. His main research interests are German and European history in the nineteenth and twentieth centuries, concentration camps, (forced) labour, National Socialism, social inequality, tax and budget policy, and governmentality. His habilitation with the title The Promise of Equality. Progressive Taxation and the Reduction of Social Inequality since 1871 was published by Suhrkamp in September 2022. He is the editor of The Political Economy of Public Finance (CUP) with Martin Daunton and Alexander Nützenadel. Sacha Dray is a Ph.D. candidate in economics at the London School of Economics. He holds a master’s degree in Economics from Sciences Po and LSE, a bachelor’s degree in Economics from Sciences Po, and a B.Sc. in Mathematics from Sorbonne UPMC University. His research interests are in economic policy and political economy around the drivers of health and wealth inequality. Prior to his Ph.D., Sacha worked as a consultant for The World Bank and the Asian Development Bank. Nasrin Düll is a student of history, sociology, and political science at the Goethe University Frankfurt. As part of her work on the research project ‘International Cultural History of Tax Morale’ by Prof. Korinna Schönhärl, she has been studying tax education programmes and tax discourses in the United States since the 1940s.

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Fabio Ecca obtained the title of Ph.D. at the University of Rome, ‘Tor Vergata’, in 2016. Ecca deals with the relationship between the public sector and the private sector during exceptional events. In recent years, his research has mainly concerned the analysis of the contracts stipulated during and after WWI. He has numerous publications on this subject, including Lucri di guerra. Le forniture di armi e munizioni e i ‘pescecani di guerra’ in Italia (1914–1922). Recently he has been dealing with the use of satirical and caricatured drawing to denounce economic and social distortions (for example: ‘“Pescecanismo”. Aspects of the Crisis of the Italian State in Dealing with War Profiteering 1915–1922’, Memoria e Ricerca, 2020/1). Fabio Ecca is currently Lecturer in Contemporary History at the Department of Humanities of the Roma Tre University. Chloe Fyfe is a doctoral researcher at the University of Glasgow. She is currently carrying out an interdisciplinary exploration of the impact that tax havens have on the art market—with a specific focus on tax evasion and money laundering in the post-Brexit climate. Luxury freeports and the development of the freeport mechanism from antiquity to the contemporary period, play a central role in this research. Her recent publications include, ‘The Legacy of Livorno: Trade, Corruption and Religion in the development of the Freeport Mechanism’, for the 8th Annual Days of Justinian Journal for the Institute of National History, Skopje. Thibaud Giddey is a lecturer at the University of Lausanne and an associated researcher at the University of Oxford. He obtained his Ph.D. in arts (history) at the University of Lausanne in 2017. He was a visiting research fellow at KU Leuven (2013), City University London (2014), and Uppsala University (2019). His research interests include the history of banking supervision, financial scandals, the development of political and financial elites, the history of white-collar crime and of lawyers as business professionals, and finally, the development of taxation and taxinduced mobility. His book, Histoire de la régulation des banques en Suisse (1914–1972) (Geneva: 2019), deals with the evolution of banking supervision in Switzerland during the twentieth century. A second coauthored book with Eiji Hotori and Mikael Wendschlag, Formalization of Banking supervision (Singapore: 2022), offers a cross-country and historical perspective on the adoption of formal financial supervision. James Hollis is a D.Phil. candidate in history at Brasenose College, Oxford, and a former holder of the Walter Scott studentship in the

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global history of capitalism. He is the author of ‘Union Cold Storage and the Birth of Multinational Tax Planning, 1897–1922’ (University of Oxford Case Studies in the Global History of Capitalism, No. 9, 2019); the co-author, with Christopher McKenna, of ‘The Emergence of the Offshore Economy, 1914–1939’, in Capitalism’s Hidden Worlds, edited by Kenneth Lipartito and Lisa Jacobson (Philadelphia: University of Pennsylvania Press, 2020); and the editor and translator of Alain Vernay’s classic 1968 work Tax Havens (Nottingham: Edward Ludlam, 2021). A qualified attorney, James has also published various technical articles on aspects of corporate taxation. Sébastien Laffitte is a post-doctoral student in economics at the Université Libre de Bruxelles. He obtained his Ph.D. from the ENS Paris-Saclay (Université Paris-Saclay) in 2022. His research is focused on international public finance. He is particularly interested in the taxation of multinational enterprises and in the role of tax havens in today’s globalised world. He participated in the French Council of Economic Analysis (CAE)’s works on evaluating the reform of international taxation. His recent work on the subject has focused on the determinants of tax havens, their role in shaping multinational firms’ decisions, and on evaluating the impact of reforms of the international corporate tax system. He has also published papers that study the link between multinational banks’ geographic expansion and their risk. Arjan Lejour is Professor of Taxation and Public Finance at Tilburg University and a project leader in the Public Finance Sector of the Netherlands Bureau for Economic Policy Analysis (CPB). Between 2011 and 2018, he was the programme leader in taxation at CPB and he has previously been a senior researcher in international economics. Lejour is an expert in (international) business taxation, tax avoidance, and tax evasion. His latest publication on ‘The Immeasurable Gains of Dutch Shell Companies in International Tax and Public Finance’ (International Tax and Public Finance) focused on the international tax avoidance of multinational firms via the Netherlands. Last year he also wrote a discussion paper, ‘Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands’ on the offshore wealth of Dutch households and the incentives of voluntary disclosure schemes. Sylvain Praz is currently researching for a Ph.D. in history at the University of Lausanne, on the tax history of the cantons of Zurich and

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Sankt-Gallen between 1860 and 1960. He has published about the taxation of small taxpayers ‘Sujétion fiscale et pratique d’imposition à l’égard des petits contribuables (Zurich 1870–1952)’ In: Sébastien Guex, Gisela Hürlimann, Matthieu Leimgruber (dir.), Steuern und Ungleichheit = Fiscalité et inégalités, Zurich, Chronos, 2021; and about the introduction of corporate tax laws in Switzerland ‘Entre justice fiscale et concurrence. La fiscalité des sociétés anonymes à Zurich et Saint-Gall (années 1860– Première Guerre mondiale)’ In: Sébastien Guex, Hadrien Buclin (éds.), La fiscalité directe des catons suisses. Législations et pratiques aux XIXe et XXe siècles = Die direkten Steuern in den Schweizer Kantonen. Gesetzgebung und Praxis im 19. Und 20. Jahrhundert, Bâle, Schwabe Verlag, 2022. A publication with Aniko Fehr (Lausanne) about tax amnesties in Switzerland (1933–1968), resulting from contribution to a colloquium about tax resistance (Frankfurt, March 2020), is under way. Isabelle Rabault-Mazières is Associate Professor at Paris 1 Panthéon— Sorbonne University and a member of the Centre d’histoire du XIXe siècle/ISOR. She is interested in economic and financial issues from a cultural and social perspective. In ‘“Mal absolu” ou “rédempteur du Peuple”? Le crédit, la dette et l’usurier dans la France du XIXe siècle’, The Tocqueville Review/La Revue Tocqueville, Vol. XL, n° 2, 2019, she has focused on social representations of credit and debt in nineteenth century France. She is currently working on the capital levy tax returns of Parisians in 1945. In ‘La justice fiscale au sortir de la guerre: l’impôt de solidarité nationale de 1945’, In: Emmanuel De Crouy-Chanel, Cédric Glineur, Céline Husson-Rochcongar (ed.), La Justice fiscale (X e –XXI e siècles), Bruxelles, Bruylant Édition, 2020, she confronts the intentions of tax justice at the heart of the 1945 capital levy in France with the files of Parisian taxpayers. Nadya Melina Ramírez Lugo studied history, cultural anthropology, theology, and Spanish at the Johannes Gutenberg University Mainz. As part of her collaboration on Prof. Korinna Schönhärl’s research project ‘International Cultural History of Tax Morale’, she studies Spain’s public discourse on tax morale, tax education programmes, and tax reforms mainly since the Transition. Other research interests include colonial history in Latin America and the cultural and social history of twentiethcentury Spain.

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Korinna Schönhärl is Professor of Modern History at the University of Paderborn. Her current research project, ‘International Cultural History of Tax Morale’, compares discourses on tax-paying behaviour in Western Germany, Spain, and the USA after 1940. Schönhärl’s post-doctoral thesis was on European investment in Greece in the nineteenth century (European Investment in Greece in the Nineteenth Century, New York: 2020). She holds a Ph.D. from Goethe University Frankfurt (Knowledge and Visions. Politics and Theory of the Economists Around the Poet Stefan George, Berlin: 2009). Further research foci are the history of economic thought, the history of risk management, moral economics, postcolonial history, and historiographic methodology. Béatrice Touchelay is Professor of Contemporary History at the University of Lille and attached to the IRHiS UMR CNRS 8529 laboratory since 2011. Her research focuses on two instruments of state intervention in France, Europe, and colonised territories (statistics, taxes), and on their bias. Her research also concerns more broadly the economic and social transformations of contemporary societies. Of her last two publications, one deals with the practices of state control over the French banking system after the nationalisations of the Liberation (I. Chambost and B. Touchelay, ‘Les figures de l’Étatactionnaire: quand l’État devient banquier’, in ‘Les figures de l’État actionnaire’, Hadrien Coutant, Scott Viallet-Thévenin (ed.), Revue de la Régulation, juillet 2021 and, with Jean-Luc Mastin (ed.), Des banques sous surveillance? Pour une histoire du contrôle bancaire (XIX e s.–début XXI e s., Villeneuve d’Ascq, Presses universitaires du Septentrion, being published 2022) and fraud, while the other presents and comments on various papers at the colloquium on fraud that she organised in Paris in 2017 (B. Touchelay (ed.), Fraude, Frontières et Territoires, Comité pour l’histoire économique et financière de la France-IGPDE, 2020). Simon Watteyne is an FNRS post-doctoral researcher at the Université libre de Bruxelles and is currently writing a book on the international negotiations between British, American, Dutch, Swiss, German, and French central and private banks to stabilise the Belgian currency in the mid-twenties. He was previously a junior research fellow and postdoctoral researcher at Wolfson College (Oxford). He earned his Ph.D. in history (La prédominance d’une fiscalité libérale en Belgique. Une histoire politique (1847–1962)) at the Free University of Brussels in 2021 and he

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is the author of Aux sources de l’impôt en Belgique. Une histoire de conflits politiques 1830–1962 (CRISP, 2022). He is also the author of several papers focusing on Belgian tax history: ‘La bataille des impôts du Parti Ouvrier Belge (1936–1938)’, Revue Belge de Philologie et d’Histoire, 2 (2021) 461–496; ‘Le coût de la première guerre scolaire et les débats des ‘Graux impôts’ (1878–1884)’, Journal of Belgian History, 2 (2020) 34–60; ‘La révolution fiscale de la Belgique martyre (1914–1920)’ In: Cédric Glineur, Emmanuel de CrouyChanel et Céline Husson-Rochcongar, La justice fiscale (X e –XXI e siècles) (Bruylant, 2020) 173–194. Katia Weidenfeld is a professor of contemporary legal history at the Ecole nationale des chartes (PSL University, Centre Jean Mabillon). Her work focuses on the history of tax law in France in the contemporary period. In this field, she recently directed and participated in a collective work on the history of the tax return, from its first applications in the eighteenth century to the introduction of the levy at source (Déclarez vos revenus! Histoire et imaginaire d’un instrument fiscal, Paris: 2019), and she also studied the claims of publicity in tax matters in the twentieth century (‘La transparence fiscale. Genèse législative d’un mythe’, La justice fiscale Xè-XXIè siècle, Brussels: 2020). Mikael Wendschlag is a researcher and lecturer at Uppsala University, Sweden. He received his Ph.D. in economics from Linköping University. His research interests are international tax evasion, financial supervision and regulation, financial crises, economic crime, and central bank history. He has conducted commissioned research for the Swedish Financial Supervisory Agency and the Swedish Riksbank. He has been a visiting researcher at the Swedish House of Finance, the European University Institute in Florence, the Swedish Riksbank, and the Institute for Economic and Business History Research at the Stockholm School of Economics, Sweden. He has also worked as a research assistant at the Swedish Institute for International Affairs. In 2020, he was awarded the annual Hans Dahlborg award for research in banking and finance.

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 3.1

Fig. 3.2

Fig. 6.1

The emergence of tax havens in the twentieth century (Source Laffitte [2022]) Tax introduction and tax havens Evolution of the number of resident foreigners benefiting from the ‘Foreigners’ Tax’ or the ‘forfait fiscal’ (1918–1956) (Sources BGC, 8 November 1920, p. 33; List of taxpayers subject to the Foreigners’ Tax, 1921–1947, Vaud Cantonal Archives (VCA), Chavannes-près-Renens, K X a 174; Gubler 1949, 98; Letter from the Lausanne District Commission to the FTA, 8 March 1950, Swiss Federal Archives, Berne, E6302B#2003/1#521*; FTA, Monthly report. Tax for national defence, 8th period. Canton of Vaud, 7 May 1956, VCA, SB 163/26, p. 4. Share of the canton’s population, calculated from figures provided by Lorusso [1989, 25–27]) Tax revenues generated by the preferential tax regime (Sources Accounts of the canton of Vaud, published in: Compte rendu du Conseil d’Etat, 1918–1960) Swedish community in Switzerland, by region (1941–2000) (Source Office fédéral de la statistique, Recensement fédéral de la population)

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Fig. 6.2

Fig. 6.3

Fig. 6.4

Fig. 7.1

Fig. 7.2 Fig. 7.3

Fig. 7.4

Distribution of Swedes in Swiss cantons by tax index, 1960–1990 (Sources Swedish population: Office fédéral de la statistique, Recensement fédéral de la population; Tax index: Steuerbelastung in der Schweiz/Charge fiscale en Suisse, Eidg. Steuerverwaltung, Aministration fédérale des contributions; Lump-sum taxation for cantons [colour code]: 1964: Bericht über die Veranlagung zur Pauschalsteuer gem. Art. 18 bis WSTB pro 12. Periode [Steuerjahre 1963 und 1964], 1973: Bulletin sténographique du Conseil national, Réponse de Nello Celio à Motion Reich, Pauschalsteuer Abschaffung, 04.06.1973, pp. 450–451, 1983: [Bernasconi 1983, 90], 1999: Die Finanzdirektorenkonferenz [FDK] zur Aufwandbesteuerung, 2009) Correlation between the density of Swedes and the level of wealth in Swiss municipalities (1980) (Sources Swedish population: Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten. Tax return index: Eidg. Steuerverwaltung Steuererträge und Kopfquoten 1981/82) 1964—lump-sum taxpayers established in Switzerland by nationality (Source Swiss federal archives, E6302B#2003/1#530*, Eidgenössische Steuerverwaltung, Bericht über die Veranlagung zur Pauschalsteuer gem. Art. 18 bis WSTB pro 12. Periode [Steuerjahre 1963 und 1964], by Max Hunziker) Average statutory tax rates for selected country groups in 2000 and 2020 (Source OECD tax database. Averages are unweighted) The size of outward FDI positions in 2018 (billion US dollars) (Source IMF CDIS database) The shares of country groups in foreign direct investment positions, 2009 and 2019 (Source IMF CDIS database) International payments for the use of intellectual property (IP) rights (Source World Development Indicators from the World Bank)

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LIST OF FIGURES

Fig. 10.1

Fig. 10.2

Fig. 12.1

Fig. 12.2

Fig. 12.3

Fig. 12.4

Fig. 12.5

An estimation of tax evasion on wealth based on inventories (1860–1918) (Sources 1860–1868: “Bericht des Regierungsrathes zu dem Gesetzesentwurf betreffend die Vermögens-, Einkommens- und Aktivbürgersteuer”, 28.09.1869, in: Amtsblatt des Kantons Zürich [Amtsblatt], p. 1676; 1869–1899: Bericht über die Finanzlage des Kantons Zürich, 28 November 1901, pp. 71–73, Schweizerisches Sozialarchiv [SozA], Zurich, KS 336/28; 1900–1918: Rechenschafts-Bericht des Regierungsrates an den Zürcherischen Kantonsrat [Rechenschaftsbericht], various years) An estimation of tax evasion on wealth and revenue based on inventories (1923–1945) (Sources Geschäftsbericht Stadtrat, 1923–1945) Tax delinquency rate (Notes This figure shows the average tax delinquency rate at the city level, broken down by cities above or below the median tax delinquency rate in 1933) Housing princes (Notes This figure shows the permit value index, broken down by cities above or below the median tax delinquency rate in 1933. Permit value index is a measure of the average cost per family housing unit as constructed by the Bureau of Labor Statistics, presented as an index, with 1930 as the base year. It is used as a proxy for house prices) Property value per capita (Notes This figure shows the average taxable property value per capita, broken down by cities above or below the median tax delinquency rate in 1933. Property value is defined as the annual value of property assessed for the purpose of property tax) Rate of property tax (Notes This figure shows the average tax rate on property applied by cities, broken down by cities above or below the median tax delinquency rate in 1933) Housing permits (Notes This figure shows the average number of housing permits, broken down by cities above or below the median tax delinquency rate in 1933. The number of permits is a proxy for residential construction activity)

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Fig. 12.6

Fig. 12.7

Fig. 12.8

Fig. 12.9

Fig. 12.10

Map 6.1

Map 6.2

Municipal Spending (Notes This figure shows the average total municipal spending per capita, broken down by cities above or below the median tax delinquency rate in 1933) Municipal revenue (Notes This figure shows the average total municipal revenue per capita from all sources, broken down by cities above or below the median tax delinquency rate in 1933) Municipal Revenue from Property Tax (Notes This figure shows the average municipal revenue per capita from property tax, broken down by cities above or below the median tax delinquency rate in 1933) Municipal Debt (Notes This figure shows the average amount of debt per capita, broken down by cities above or below the median tax delinquency rate in 1933) Trends in Municipal Finances and Housing Markets (Notes See main text for details) Swedes in Switzerland: communal distribution (1980) (Source Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten) Swedes in Lake Geneva Region: communal distribution (1980) (Source Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten)

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252 259

127

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List of Tables

Table 6.1 Table 6.2

Table 6.3 Table 7.1 Table 7.2 Table 9.1 Table 9.2 Table 10.1 Table 10.2 Table 10.3

Table 10.4 Table 11.1

Swedish emigration and immigration to and from Switzerland, 1971–1981 Swedish emigrants with Riksbank permission to move more than one million SEK out of the country, number, per cent and country of destination, 1964–1984 Socio-economic profile of Swedes in Switzerland 1977 (per title) (n = 192) Changes in tax characteristics between 2009 and 2017 (averages for 108 countries) Impact of tax havens and conduit countries on tax avoidance Corrected tax returns and additional revenues from Prussian income tax, 1900–1908 Top Rates of Income Tax 1917/18 (in %) Indirect estimations of wealth that should have been taxed (millions CHF) Wealth discovered through inventories according to the wealth level of taxation (1890–1896) The proportion of taxpayers who were caught evading taxes in the jurisdiction of the city of Zurich, according to the level of taxable wealth (1896–1916) The taxpayers who used the tax amnesty in 1936, according to the level of taxable income Summary diagram of the revenue from taxes on war profits

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122 133 147 152 185 194 204 205

208 214 235

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LIST OF TABLES

Table 11.2 Table 12.1 Table 12.2 Table 12.3

Summary diagram of the application of the reduction coefficients for comparability between the different years Summary statistics Determinants of tax delinquency Consequences of pas delinquency

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CHAPTER 1

Introduction. “Low-Tax Predators” Rather Than “Tax Havens”: New Perspectives on the History of the International Tax Evasion and Avoidance Market Sébastien Guex

The numbers are astronomical. According to a study presented in November 2021 by the most reliable NGO on international taxation, the Tax Justice Network, “multinational corporations are shifting US$1.19 trillion worth of profit into tax havens each year, causing governments around the world to lose US$312 billion a year in direct tax revenue”

I am very grateful to Janick Marina Schaufelbuehl for her valuable assistance in writing this introduction. S. Guex (B) Department of History, University of Lausanne, Lausanne, Switzerland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_1

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(TJN 2021: 30). As for the financial wealth owned by the rich or superrich individuals and hidden from the tax authorities of their country of origin in tax havens, it amounts to about $10’000 billion, which equals the combined GDP of Germany, the UK, France and the Netherlands. This means there is an additional loss of revenue of about $171 billion, which brings the total to $483 billion, a sum equivalent to the tax revenue of a country like Spain (TJN 2021: 42 and 46–53). But these sums, although gigantic, represent only a fraction of the total amount of tax evasion and avoidance. To name only one of these estimations’ shortcomings: they do not take into account the non-financial assets (such as real estate, gold, cultural goods, etc.) which are evaded from taxation by wealthy individuals and which are three to four times higher than the financial assets (TJN 2021: 47). These figures alone show that this book deals with phenomena that play a major role in the functioning of contemporary capitalism: tax evasion and tax avoidance by the possessing classes, especially when this practice that can be called escape from taxes or tax non-compliance is performed on an international scale, i.e., by resorting to tax havens. However, these phenomena are neither new nor even recent. As several contributions in this book show, they have a long history that reaches back well into the nineteenth century. In this article, it is not possible to trace even the lineaments of this history, especially since it is intricate and complex. I will content myself with presenting some considerations on aspects that, from a methodological point of view, in particular, seem particularly important to me. I do not claim to offer anything like a comprehensive reflection on these subjects, since the current state of knowledge does not allow for this. My hope is to encourage new research on these issues, which will undoubtedly correct in part what is going to be presented.

A History Still in Its Infancy Since the 1990s, the literature devoted to international tax evasion and avoidance, and in particular to the misnamed—I will come back to this problem—“tax havens” has grown almost exponentially. In their 2010 study, which to my knowledge is the best overall analysis of these phenomena, Ronen Palan, Richard Murphy and Christian Chavagneux note that there is “a veritable explosion of new information” (Palan et al. 2010: 4). If we limit ourselves to academic literature, a search using the

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keyword “tax haven” and including only doctoral theses listed in the “Proquest Dissertations & Theses” database supports this observation: since 1990, nearly 750 of these works have been devoted to the issue of tax havens, or significantly address it, and their number has roughly doubled from one decade to the next.1 There is therefore an impressive literature, including academic literature, on the field of tax evasion, tax avoidance and tax havens. But, within this vast literature, the number of works that have taken an in-depth and problematized interest in the history of these phenomena, in particular, in their distant history, remains very limited. For the most part, and again to the best of my knowledge, these are studies by Piciotto (1992), Hampton (1996), Palan (2003), Godefroy and Lascoumes (2004), Rawlings (2004), Spoerer (2004), Palan et al. (2010), Freyer and Morriss (2013), Farquet (2016), Ogle (2017, 2020), Hollis and McKenna (2020) and Guex (2021). The paradox is therefore striking: There exists a very abundant literature on the issue, but it is very poor on the historical level. This observation is shared by many authors. In 2004, Gregory Rawlings deplored that this literature was characterized by a “lack of historical perspective”, with the result that “tax havens are presented as new, sudden and aberrant intrusions into the world’s financial markets” (Rawlings 2004: 326). A dozen years later, Vanessa Ogle noted that “the archivally based literature on tax havens and offshore jurisdictions is extremely scarce” (Ogle 2017: 1437). Finally, James Hollis and Christopher McKenna have recently in turn highlighted “the comparative scarcity” of historical research, pointing out that this scarcity “is certainly surprising” (Hollis and McKenna 2020: 158). There is also a second problem. It is true that the literature on tax evasion and avoidance and/or tax havens often briefly touches on the history of these phenomena. However, in these cases, the studies are almost always characterized by very serious shortcomings, including those produced by academia. They generally don’t follow basic methodological rules required by historical research and often are surprisingly superficial. What makes matters worse is that they tend to peddle and propagate many fictions or falsifications—terms which seem to me more appropriate than those of myths or legends which are generally used—in part fabricated by 1 The search was performed with the single keyword “tax haven”; https://www.pro quest.com/pqdtglobal/advanced/empty?accountid=10226 Accessed 29 April 2022.

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the promoters and defenders of tax evasion and tax havens themselves. Sometimes these studies even add new fictions or falsifications, such as a recent study that claimed, without any foundation, that at the beginning of the twentieth century, in Switzerland, tax competition between cantons was imported from the United States and that the tax privileges granted to holding companies were copied from England (Tobler 2019: 56). In short, as Ronen Palan noted in 2009, “the history of tax havens is riddled with myths and legends” (Palan 2009: 2). As a result, despite the existence of a vast literature, not only the understanding but also the simple knowledge of the origins and evolution of tax evasion, avoidance and havens remains very incomplete and approximate. How to explain such a paradox? It seems to me that three avenues of reflection lead to the beginning of an answer. First, this literature is almost entirely produced by political scientists, lawyers, economists, tax experts and journalists, that is to say, by categories of researchers who are essentially interested in the present or the very recent past. Moreover, a significant part of them is more or less directly linked to the different actors of the international tax evasion and avoidance market. Thus, one of the first and most influential comprehensive studies of tax havens, published in 1971 by The Economist Intelligence Unit and written by two tax experts (Doggart and Voûte 1971), was in fact a kind of guide for wealthy people who wanted to make up their own minds about which haven or havens best suited their situation and needs. In a slightly different form, it was reprinted and translated several times from 1975 onwards (Doggart 1975; Brittain-Catlin 2010). In the eyes of this group of authors, history is therefore of little interest or, at best, of marginal or anecdotal interest, as Vanessa Ogle noted: “The vast majority of works on tax havens is by political scientists or writers for a broader, popular audience. In this literature, historical developments are normally addressed as background introduction” (Ogle 2020: 218). The second avenue of reflection is that a considerable part of this literature favours an approach to tax non-compliance that is not only centred on the individual but also naturalizes or essentializes this phenomenon, and therefore tends to be ahistorical. Indeed, it sees tax evasion and avoidance as the result of an innate individual disposition, and thus as an immutable or timeless phenomenon because it is rooted in the “nature” or “essence” of human beings (Leroy 2007: 98). For example, a tax manual published in 2011 states in a typical fashion that “Tax noncompliance is as old as the world” (Alink and van Kommer 2011: 163).

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In 2013, the tax expert of the most influential Swiss daily newspaper, the Neue Zürcher Zeitung, claimed: “Tax evasion […] is a constant of human nature”.2 And finally, the axiom political scientist Sven Steinmo introduced in a recent book on tax non-compliance is: “No one likes to pay taxes” (Steinmo 2018: 5). It should be noted that this approach is part of a long tradition: “...there is hardly any other one thing which human nature so much dislikes to do as to pay taxes”, the American economist David Ames Wells argued more than a century ago (Wells 1900: 515). For his part, since the 1870s, the most influential French economist of the time, Paul LeroyBeaulieu, has repeated over and over again that “given human nature” there is a “universal tendency to defraud the state” (Leroy-Beaulieu 1879: 209; see also 260). And in 1911, a jurist from the French tax administration began a study of tax evasion with these words: “…man has a natural tendency […] to consider taxes as a prejudice caused to him, rather than as a just contribution to public expenditure; the individual has always preferred his own interest to that of the community” (Garnier 1911: 3– 4). Such a notion, like any naturalizing or absolutizing understanding, tends to be ahistorical, not to say antihistorical, since it considers escape from taxes as a purely individual phenomenon that is supposed to occur at all times and in all places, and not as a social phenomenon, which is born from social relations and evolves according to changes in these relations, i.e., according to circumstances. The least that can be said is that it does not encourage a rigorous and meticulous examination of the appearance, evolution, expansion or decline of tax evasion and/or avoidance, in short, of its concrete history. However, and this is the third avenue of reflection, what has just been said does not offer a sufficient explanation of the shortcomings of literature on tax evasion, tax avoidance and tax havens. There remains the fact that, apart from a small number of historians, many of whom have been mentioned above, historians themselves have hardly delved into the history of tax evasion and avoidance over the past two centuries, and even less into that of tax havens. They therefore share some responsibility for the flaws of historical research in this field. Why is there a certain lack of interest in this subject? It seems to me that part of the reasons come from the major decline that socio-economic history has suffered within

2 Neue Zürcher Zeitung, 6 April 2013.

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academic research for three or four decades and until recently. All the more so since this decline has been to the benefit, on the one hand, of post-modernist cultural history and, on the other, of “historical economy” (Gervais 2019: 26; see also Margairaz 2013: 81). The latter is largely dominated by economists of the classical and neoclassical school, who are generally more concerned—in the field of taxation as in others (Vlcek 2008: 34–41)—with forcing reality into their highly formalized models than with confronting reality itself. Secondly, we must, however, also insist on the fact that any in-depth and rigorous historical exploration in the highly sensitive field of escape from taxes runs a serious danger, one that may discourage many vocations. This danger is that of encountering what two researchers working on the role of the State of Malta in the international tax evasion and avoidance market have called the “conspiracy of silence” (Fabri and Baldacchino 1999: 157), that is to say, the profound hostility of the powerful actors, promoters and defenders of this market, and the multiple, often insurmountable, obstacles that they oppose to any scientific historical investigation. To conclude this brief historiographical discussion, it is time to specify not only the ambitions but also the limits of the present book. Overall, its objective is to contribute to fill some of the gaps in historical research mentioned above. In other words, it aims to improve our knowledge and understanding of the history of tax evasion and avoidance, especially when these are practiced internationally, using states or jurisdictions specifically set up for this purpose: tax havens. There are some limitations, of which the first is spatial. The contributions gathered here focus strongly on Western Europe and only marginally consider certain other continents, while completely ignoring some. The second limitation is temporal. If the book—and this is one of its main contributions—goes back a long way in history, to the middle of the nineteenth century, it does not deal much with the very important developments that have occurred since the 2000s (see, however, the chapters by Lejour and Fyfe in this book). The third limitation is thematic. Going beyond the framework set at the outset of this book, a series of major issues—for example, the effects of tax evasion, avoidance and havens on the globalization of the economy, on the evolution of taxation on the worldwide scale or on the development of social inequalities—are not taken into account, or only marginally.

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A New Periodization and Its Consequences In the literature, that to date has examined the birth and evolution of the international tax evasion and avoidance market, and thus of tax havens, there is a consensus on the main phases of this history. The phenomenon truly emerged during the interwar period, grew significantly during the decades following the Second World War, and soared in the 1970s. Vanessa Ogle deserves the credit for having offered the most synthetic summary on this subject. She writes: “An assessment of its historical scale and scope reveals that there were three distinct phases in its development. During the first phase, which lasted from roughly the 1920s to World War II, the offshore world, and tax havens in particular, emerged on a mostly moderate scale. The second phase, which lasted from 1945 to 1975, saw the significant growth of the offshore world. A third stage then began in the 1970s, which was marked by [a] dramatic expansion…” (Ogle 2017: 1436). Scholars may differ slightly on the temporal boundaries of the second and third stages, but, along with Ogle, they are unanimous on one point: the true emergence of the phenomenon occurred after World War I, in the 1920s or 1930s (Picciotto 1992: 22, 118; Hampton 1996: 17, 36; McCann 2006: 20; Sharman 2006: 22; Godefroy and Lascoumes 2010: 26–27; Palan et al. 2010: 107–118; Farquet 2016: 26–27, 75; Keen and Slemrod 2021: 258). In other words, they agree, as historian Mark Spoerer has forcefully argued, that “…there is no evidence that tax competition occurred at the international level before World War I” (Spoerer 2004: 192; see also Farquet 2018: 52–53). The question needs to be studied much more thoroughly, but there is already sufficient evidence that this periodization does not correspond to reality in one respect. The process that saw the emergence of the first tax havens actually began already in the second half of the nineteenth century and led to serious international tax competition even before the First World War. Let us briefly review the main clues that support this revised periodisation. 1. From the second half of the nineteenth century, at the instigation of tourism and banking circles interested in transforming Switzerland into a privileged resort destination for international high society as well as in developing wealth management activities, several cantons—Geneva, Vaud, Neuchâtel, Grisons, Ticino and Lucerne—adopted a series of tax provisions. These provisions almost

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totally exempted a certain category of residents from taxation: the wealthy rentiers from neighbouring countries or even from overseas who came to reside, for a long time or even permanently, in these cantons (Guex 2021; Ballenegger and Giddey, Wendschlag in this volume). It is highly probable—but this would have to be confirmed by further research—that in Germany and, perhaps, in France, some tourism regions have obtained similar tax privileges in order to compete with these Swiss cantons.3

2. As early as the last decades of the nineteenth century, the Swiss and Belgian banking circles entered into a lively competition to attract— with undeniable success—the financial wealth of the possessing classes wishing to escape various tax measures affecting them in France and, to a lesser extent, in Germany and other countries (Guex 2021; Watteyne in this volume). In order to capture this capital, Swiss and Belgian banks have already progressively put into place certain tools and practices intended to actively incite and assist the capital’s owners to escape tax authorities, devices which would make headlines from the 1970s onwards: for example, the intensive canvassing of potential clients by clandestine bank representatives, whom a French jurist of the time called “tax evasion clerks [commisvoyageurs de la fraude]” (Girard 1916: 44); the use of numbered accounts, false names and straw men to best conceal the identity of the true owners of the deposits made with the banks; or the joint account, a tailor-made instrument to evade inheritance tax. And when the French state attempted to hinder this activity by, among other things, asking the Swiss and Belgian governments in 1907 to sign treaties that would introduce the automatic exchange of tax information, the Swiss and Belgian not only flatly refused but even publicly guaranteed to categorically respect banking secrecy vis-à-vis foreign tax authorities, a fact which is crucial (Farquet 2016: 49– 58; Watteyne in this volume). In both countries, the development and defence of this strategy of international tax competition has thus become a position openly adopted by the State.

3 See Neue Zürcher Zeitung, 17 December 1869, Gazette de Lausanne, 27 December 1897 and New York Times, 9 December 1900.

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Banks in other countries—not only the United Kingdom, in particular, but also in Germany, Luxembourg and probably the Netherlands and Spain—have also tried to compete in this market segment (Guex 2021: 13). Why and to what extent have they done so? What means did they use and with what success? Unfortunately, there is still so little research on this history that it is not possible to give even an approximate answer to these questions.

3. In the decades immediately preceding the First World War, competition also developed between different states or jurisdictions that sought to attract the headquarters of large corporations to their respective territories through the granting of tax privileges. As this competition is even less known than the competition for the wealth of individuals, there are considerably more unanswered questions about it. Did the US states of New Jersey and Delaware play a pioneering role in this respect, as a large part of the literature claims, but without being truly convincing (Guex 2021: 19–20)? Were the Netherlands and the United Kingdom already in the game, the latter particularly relying on Jersey and Guernsey (Palan et al. 2010: 110; House of Commons 1906: 131–132; Hollis in this volume)? This may be the case. 4. What is certain is that, in 1903, inspired or stimulated by the banking and industrial employers of the neighbouring Swiss canton of Zurich, the authorities of the canton of Glarus adopted provisions that virtually exempted the so-called “domicile” or “letterbox” companies, such as holding companies, from taxation. The example of Glarus was soon followed by the Swiss cantons of St. Gallen and Schaffhausen, with quite some success (Guex 2021: 8–9). Again, there are several indications that Belgium was Switzerland’s main competitor in the efforts to induce foreign companies to establish an administrative seat on its territory by granting tax privileges (Bitsch 1994; Watteyne in this volume). 5. Last but not least, even if this is again a very little researched subject, it seems that the growing competition between banks in Europe in the half-century preceding the First World War led British, French, German, Belgian and Swiss authorities to begin to use taxation as an instrument of competition with the aim of attracting certain international financial operations to their financial centres, such as

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the issuance of loans, sales and purchases on the stock exchange, the financing of large international trade, etc. The measures sometimes merely were meant to prevent competing financial centres to attract these lucrative financial operations (Kaufmann 1914: 109; Guex 2021: 9–10; Watteyne in this volume). Despite many remaining uncertainties, it is therefore possible to affirm that even before the First World War an international market for tax evasion and avoidance services was formed. This is the term that seems most precise, but I will henceforth use a slightly shorter and less cumbersome expression, that of an international tax evasion and avoidance market. This market involved actors, above all financial actors, from at least six or seven countries. Two states that had already turned into actual tax havens, Switzerland and Belgium, were particularly proactive. Contemporaries were fully aware of the phenomenon. To cite just one example, in a speech in the Belgian Parliament in August 1913, the influential businessman and member of parliament Louis Franck characterized Switzerland and Belgium as “oases in the midst of the invasive and often aggressive taxation of the large neighbouring countries” (quoted by Watteyne in this volume). He went on to point out, as did many other deputies,4 the competition which existed between the two states in tax matters. If the exact expression “tax haven” was not used on this occasion, the terms used were strikingly close. Another unmistakable sign of the establishment of such a market was the appearance of the first publications giving advice on the procedures that could be used internationally to escape the taxes of one’s own state. They made comparisons between the services provided in different states or jurisdictions, notably in Switzerland, Belgium or England, such as, for example, the degree of security and discretion offered by the joint account system (see, for example, Petitpas 1909; Chamber’s Journal 1910: 660–662; Depuichault 1911; Sigrain 1914). These publications were actual precursors of the modern guides to tax havens that proliferated from the 1970s onwards. Based on these considerations, it is possible to propose a different periodization from the one developed so far. It distinguishes four major phases in the history of tax havens (see also Laffitte in this volume). The

4 See Annales parlementaires de Belgique—Chambre des Représentants, 7, 12, 13 and 19 August 1913: 2127, 2209, 2258 and 2326.

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first, which ran from the last decades of the nineteenth century to the First World War, saw the emergence of the first tax havens. During the second period, the interwar years, the number of tax havens increased significantly. After the Second World War and until the end of the 1960s—the third phase—growth of tax havens accelerated before it skyrocketed from the 1970s onwards, which can be considered the fourth phase. Perhaps are we now in the process of moving into a fifth phase, characterized by a slowdown in the growth of the international tax evasion and avoidance market, its stagnation or perhaps even a certain decline, due to the campaign against it led, especially, under the aegis of the OECD? It is too early to say. An important conclusion can be drawn from this new periodization. When explaining tax evasion and avoidance, existing literature overwhelmingly tends to attribute a decisive role to the height of the tax burden. In other words, this almost ritualistic explanation—so much so that it can be called a “vulgate” (Spire and Weidenfeld 2015: 7)—establishes a decisive, even exclusive and unidirectional causal link between the degree of the tax burden and the extent of tax evasion and/or avoidance: the higher the former, the greater the latter. This causal link was even promoted to the status of a “law of increasing tax resistance” by a German economist, Wilhelm Gerloff, in his influential Handbuch der Finanzwissenschaft (Handbook of Financial Science) (Gerloff 1956: 630). With regard more specifically to tax havens, this vulgate seems to be confirmed by the periodization established so far, since their origin and evolution are explained according to the following scheme: because of the First World War, the levels of the taxes affecting the possessing classes increased considerably. Consequently, these classes were said to have been much more inclined than before the war to try to escape their tax obligations, hence the appearance of the first tax havens during the interwar period. The even higher levels established after the Second World War are supposed to explain the multiplication of tax havens in the second half of the twentieth century (Palan 2003: 5–6). At this point, I should make a brief digression in order to point out that the conception that there is a decisive causal link between the burden of taxation and tax non-compliance has been elaborated and tirelessly propagated for a very long time by the possessing classes themselves, as well as by their representatives in the political, media and academic spheres. There are several reasons for this, starting with the fact that it is linked

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to these classes’ ideology, which is mostly economically liberal and utilitarian. But it should be noted that from their point of view, there is also a crucial political and practical advantage to this notion. Indeed, if the growth of taxes affecting the capitalist and wealthy circles automatically translates into increased non-compliance of their tax obligations, the most logical and simple conclusion is to tax them only lightly or not at all. Numerous contributions in this book show that the issue of tax evasion, tax avoidance and tax havens can be instrumentalized very effectively by the ruling class, either to fight new taxes or tax increases or to obtain the lowering or the abolition of existing taxes (Ballenegger; Watteyne; van Beurden; Fyfe; Buggeln; Praz; Ecca; Dray; Weidenfeld; Hollis; Touchelay; Rabault-Mazières). I will return to this aspect later. But let us return to the explanatory scheme mentioned above. From the second half of the nineteenth century to the First World War, although the tax burden on the wealthy tended to increase, it remained relatively low, in any case at levels very considerably lower—by five to ten or even twenty times—than those which they would reach after the war. For example, in ten countries participating in the First World War, the highest nominal marginal income tax rate was, on average, around 3 per cent between 1900 and 1913, a level ten to fifteen times lower than that which it would reach in the same countries after the war. In France, this rate was 2 per cent on the eve of the world war, whereas it rose to between 20 per cent and 72 per cent during the period of 1919–1929. In the United Kingdom, this rate was 8.3 per cent in 1913 and was raised to 50–60 per cent between 1919 and 1929. The highest nominal marginal rate of the inheritance tax on direct descendants was, on average in 19 industrialized countries, 3.3 per cent in 1880 and 4 per cent in 1913, a level four to five times lower than in the 1920s. In short, as the study from which these figures are taken summarizes, the tax burden on the rich before World War I remained, if compared to that which has prevailed since, “at very low levels” (Scheve and Stasavage 2016: 89; see also 54–113). Yet this same period, 1850–1914, was characterized by tax evasion and avoidance among the possessing classes of considerable, even massive, magnitude, which in no way was significantly less than that reached after the First World War (Becqué 1912: 310–317; Sabine 1966: 178– 181; Witt 1970: 371; Ardant 1972: 415–419; Colley 1998: 313–323; Daunton 2001: 197; Morgan et al. 2009: 1365; Martin 2013: 27; Ballenegger; Watteyne; Buggeln; Praz; Ecca; Hollis; Weidenfeld in the present volume). Moreover, this escape from taxes was increasingly

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accomplished through foreign jurisdictions and was thus accompanied, as we have seen, by the emergence of an international tax evasion and avoidance market, in other words, of the first tax havens. In addition, there is another fact that invalidates the vulgate about the history of tax havens. The proliferation of tax havens from the 1970s onwards did not occur during a period of rising but falling taxes on the possessing classes, as Ronen Palan convincingly points out (Palan 2003: 9–13). Between 1980 and 2013, the highest nominal marginal income tax rate fell, on average in 20 economically developed states, by about 35 per cent, and the top nominal marginal rate of the inheritance tax by about 45 per cent (Scheve and Stasavage 2016: 10). As for the global average statutory corporate tax rate, between 1985 and 2018, it has fallen by about half, from 49 per cent to 24 per cent (Tørsløv et al. 2018: 1). The idea that the degree of tax burden affecting the wealthy is the decisive, if not the exclusive, cause of the intensity of their tax evasion and avoidance and of the formation and development of tax havens does not square with the facts. This does not mean that the tax burden has no influence, far from it. However, it is clear that other elements play an equally or probably even more important role. Let us now consider these elements briefly.

Factors Behind the Formation and Development of Tax Havens Several studies have highlighted certain factors that contributed to the emergence and spread of tax havens, such as the multiplication of sovereign states in the nineteenth and twentieth centuries and, consequently, inconsistent and even contradictory national conceptions of taxation; the increasing internationalization of the economy and in particular of capital flows during the same period; the strongly federalist structure of important states; or the contradiction between the rapid modernization of certain social formations, on the one hand, and their attachment to the past, on the other (Picciotto 1992; Hampton 1996; Palan 2003; Palan et al. 2010). Without denying the influence of these aspects, it seems to me that they do not go to the heart of the problem. I would therefore like to draw attention to four factors that these studies have only touched on at the margin and that seems to me to play a role

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that is all the more important because they combine and reinforce each other. It is well established historically that the fundamental tendency of any ruling class since antiquity is to pay as little tax as possible, except when its very dominance is challenged by an external threat such as war, and/or an internal threat such as the struggles of the dominated classes (see, for example, Bihr 2019). However, this tendency of the ruling class is reinforced in the capitalist system by the system’s very foundations. In this respect, two factors are at work. On the one hand, since this system is based on the generalized competition of capitalists with each other, each individual capitalist can only survive in the long run on the condition of making maximum profits, and therefore paying the least amount of taxes possible (Krätke 1984: 156, 168–169, 186). “If industrialists in country A can sell their products cheaper in country B by escaping taxation, the firms in the latter country risk being eliminated”, a renowned tax historian has pointed out (Ardant 1972: 683). The founder of one of the world’s largest trading companies said, in 1998, that a company “cannot grow and compete internationally if it does not use tax havens”.5 On the other hand, and more generally, the capitalist system is founded on the inalienable right to private property, a right that at the same time reflects and consecrates both the sacralization and the fetishization of private property and its accumulation by the bourgeoisie. As a result, the bourgeoisie tends to consider any tax levy that impedes the growth of private property as a violation of this fundamental right and therefore as an evil in itself. Thus, in his landmark book published in 1817, David Ricardo posed as a principle that “there are no taxes which have not a tendency to lessen the power to accumulate” (Ricardo 1821 [1817]: 164). The same view was held by his contemporary, Jean-Baptiste Say, who wrote in 1803: “Public contributions, even when they are agreed to by the nation, are a violation of property…” (Say 1972 [1803]: 134). A century later, in 1906, discussing the taxation of business, a report prepared by the highest authorities of the State of California in close contact with the business community of that state came to the following conclusion: “A general income tax is un-American. Our people have so much respect for labour that what is won by honest toil is regarded

5 Claude Dauphin, founder of the company Trafigua, interviewed in Les Echos, 12 November 1998.

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as sacred and not to be reduced by direct taxation” (Report of the Commission 1906: 14). This element, added to the previous one, implies that within the possessing classes, the legitimacy of taxes affecting them and, therefore, the extent to which one is willing to submit to them, remain low, except, once again, in exceptional times (war, important social tensions) (Krätke 1984: 60–61; Picciotto 1992: 86–92). The tendency of the bourgeoisie to regard these taxes as a spoliation, and thus as illegitimate, is shown by the remarkable persistence and the no less remarkable echo of the discourse presenting any tax burden on the possessing classes as too high, regardless of its actual height, and thus even when it was in reality very moderate. In 1850, the economist Frédéric Bastiat wrote that any “progressive tax” constituted “legal spoliation” (Bastiat 1863 [1850]: 355). Half a century later, speaking of the British bourgeoisie, the economist and deputy Leo Chiozza Money pointed out that “the present income-tax to which such terms as ‘oppressive’, ‘iniquitous’, and ‘intolerable’ are so freely applied, takes but about 3 per cent of the net income” of the part of the population with very high incomes (House of Commons 1906: 258). At the same time, in France, Paul Leroy-Beaulieu used exactly the same terms—along with a few others: “colossal”, “extravagant”, “confiscation”, “theft”, “arbitrary”, “despicable”—to describe the inheritance tax, of which the nominal rate for very large fortunes inherited in the direct line of descent was then 6.5 per cent, or to qualify the progressive income tax then in the making, of which the highest nominal marginal rate will be set at 2 per cent (Leroy-Beaulieu 1911: I–IV). Let us now turn to a third factor that contributed to the emergence and spread of tax havens. The bourgeoisie is characterized by what Alexis Spire has aptly phrased a “relativistic relationship to the rule”. He explains that “those at the top of the social space share the certainty that regulations are necessary for the proper functioning of society, but that the elites must be able to free themselves from them”. And the French sociologist specifies that “in the tax field, this translates into the fact that these taxpayers […] [are] convinced that any rule can be interpreted, negotiated, or even neutralized…” (Spire 2012: 12; see also Herlin-Giret 2017). One could not be clearer. Several contributions in this book illustrate how the tendency of the bourgeoisie to consider itself above the law prompts it to disregard or only partially comply with tax rules (van Beurden; Giddey, Wendschlag; Buggeln; Praz; Ecca; Weidenfeld; Hollis; Touchelay; Rabault-Mazières; Schönhärl, Düll, Ramirez Lugo).

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The three factors that have just been mentioned combine to create within the possessing classes a mentality—perhaps we should even speak, with the sociologist Pierre Bourdieu, of a habitus, i.e., a system of norms and behaviour incorporated by the members of these classes (Bourdieu 1994)—that is particularly hostile to the taxes that affect them, and therefore makes them particularly willing to escape from them, even when the level of their tax burden can be considered low. A fortiori, this statement is valid when this level increases. The strength of this mentality or habitus is illustrated by the fact that within the bourgeoisie, it can be seen as proof of “stupidity” or “naivety” for someone not to escape from all or part of their taxes, and can even call into question their reputation, or even their social status (Piatier 1938: 16; Praz 2016: 155). In this respect, the expression “impôt des poires [tax on the duped people]”6 used in 1922 by Louis Loucheur, an important businessman and longtime Minister, to characterize the income tax in France has become famous. A few years earlier, in 1907, the editor-in-chief of the daily newspaper L’Echo de Paris encouraged his wealthy compatriots in an editorial to entrust their financial wealth to a foreign bank in order to “protect it” from the tax authorities, whom he characterized as “robbers”, and repeated several times that those who did not do so, the “honest people”, were just “stupid”.7 Perhaps the most striking illustration of this mentality or habitus comes from three examples relating to the Swiss bourgeoisie, each having taken place a century apart. Thus, in 1812, in the canton of Basel-City, when the highest effective rate of income tax was as low as 2 per cent, an official report noted that “the conscientious bourgeois, who pays his taxes correctly, is laughed at” because, the report explained, most of his peers pay “a pittance which does not correspond at all to what they should pay” (Schanz 1890: 9). Almost a century later, a member of one of the most powerful families in the same canton said: “We, citizens of Basel, have never paid taxes on our large fortunes correctly, exactly as the law requires […]. For the wealthy man in particular, who is still active in the economy, it is simply not possible to declare his wealth to the tax authorities calculated down to the last penny. For reasons related to his

6 Journal officiel de la République française. Débats parlementaires. Chambre des Députés, 7 November 1922: 2982. 7 L’Echo de Paris, 19 January 1907.

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credit, survival forbids him to fully satisfy his tax obligations. Every citizen of Basel was fully aware of this”.8 Let us point out that at the time these words were uttered, the highest nominal marginal rate of wealth tax reached only 3 per millet and that of income tax 13 per cent (the effective rates were significantly lower) ( De Cérenville 1898: 81–82 and Table 5; Haitz 1950: 92). Coming full circle, in January 2012, the important Swiss private banker Konrad Hummler publicly asserted that “whoever pays taxes is stupid”.9 To understand the fourth factor that contributed to the emergence of an international tax evasion and avoidance market already before the First World War, as well as to its evolution during the twentieth century, it is necessary to insist on an aspect that I have mentioned above. It was the banking circles in Switzerland, Belgium, England, Germany, etc., that set up a series of instruments—joint accounts, canvassing of clients on the spot, procedures ensuring secrecy and anonymity, etc.—intended that they be entrusted with the management of the financial wealth of the possessing classes wishing to escape from the taxes of their own countries, starting with France. It is also banking circles, as well as those of the tourism industry, which, in Switzerland and most probably in Germany, perhaps also in France as well as in other countries, have worked for an almost complete tax exemption of foreign rentiers living off their wealth in order to incite them to stay durably, or even to reside, on their territories. It is the business leaders in the industrial and banking sectors who—in Switzerland and most likely also in Belgium and probably in England as well as in one or two other countries—have pushed authorities to adopt tax privileges intended to encourage the establishment on their territory of domiciliary companies by foreign firms. In short, the banking and tourism sectors were the driving forces behind the development of what several authors have called, much later, a tax evasion and/or avoidance “industry” (Cosson 1971; Swiss Trading SA 2011: 233; Sikka and Willmott 2013; Rostain and Regan 2014; Ogle 2017: 1435; Noël 2018: 107; Ballenegger and Hollis in this volume), an “industry” that was and still is often involved—but I won’t go into this dimension, which is largely outside the scope of this paper—in the laundering of “dirty” money, i.e., of income from illegal activities such as

8 Quoted in Basler Nachrichten, 20 December 1908. 9 Quoted in Neue Zürcher Zeitung am Sonntag, 29 January 2012.

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drug trafficking, corruption, prevarication, etc. (Godefroy and Lascoumes 2004). The banking sector played this role because it siphoned off foreign capital that sought to escape from tax authorities, which enabled it to develop two market segments: wealth management and international financial operations. It should be noted that these activities tend to generate higher profitability than usual financial transactions, because the services related to tax evasion or avoidance are at the limit of legality or beyond it, and therefore can be sold at better prices. As one banking expert points out, banks that specialize in dealing with tax evaders and avoiders achieve “considerable margins at comparable low costs”, which means that they are “highly profitable” (Birchler et al. 2013: 48; for an example of these margins, see Hearings 1937: 131–132). As for leaders in the tourism sector, by attracting a large number of wealthy individuals for long-term or even permanent stays in the country, they were able to profile themselves in the most profitable segment of the industry, namely in sedentary luxury tourism. These kinds of tourists brought the advantages of high expenditures, but also of entrusting local bankers with the management of all or part of their movable assets (Guex 2021: 5–6). Both the sectors of banking and tourism can therefore be considered pillars of the development of the tax evasion and avoidance “industry”. However, this “industry” has included or interested, and still interests, much wider circles, starting with the numerous lawyers, notaries, financial companies, insurance companies, accounting firms, trust companies, tax consultancies, etc., in short, the “merchants of law” (Dezalay 1992; see also Hampton 1996: 18–33; O’Hara and Ribstein 2009; Surak 2020) and/or of “tax consultancy” (Spire 2011: 67). They have also contributed and still contribute powerfully to the development of this “industry” from which they derive very substantial revenues. In addition to these circles, which benefit directly from tax evasion and avoidance, there are many other social groups within the bourgeoisie, the petty bourgeoisie and even wage earners who benefit indirectly. Let us name some important examples. The attraction of foreign capital, which is not subject to taxation in its country of origin, tends to lower interest rates in the country of arrival, which in turn tends to increase the competitiveness of industrial employers. The sedentary luxury tourism and the arrival of foreign companies stimulate the luxury industry and trade (watchmaking, jewellery, art market, etc.), push up the land rent, spur the construction sector, encourage the development of the educational (private schools and universities) and medical (private medical institutions) “industry” and

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benefit important groups of employees in all the sectors that have been mentioned so far, from bank executives to the domestic staff of luxury homes (Rawlings 2004: 333; Guex 2021). Last but not least, this predation of wealth and profits from other countries, and thus of the corresponding tax revenues, has tended and still tends to increase the tax revenues of predatory jurisdictions and thus to improve their competitiveness, both in terms of expenditures (they allow for the establishment of quality conditions for production: infrastructure, education, etc.) and in terms of taxation (they allow for a relatively moderate tax burden on resident individuals and companies). In the globalized capitalist system, in which companies and their respective states are in fierce competition, such advantages have been and continue to be considerable assets. As early as 1897, Paul Leroy-Beaulieu, in an editorial about escaping taxation through the transfer of financial wealth to a foreign country, emphasized the advantage that this had for the recipient country: “Wherever the hidden sources of this wealth and income may be, a part of it falls indirectly into its hands”.10

The Predatory Role of Tax Havens The importance of the aspects discussed above cannot be overestimated. Indeed, they call into question the current explanatory scheme of the emergence and development of tax havens. Let us recall that in the traditional view tax havens were born and developed because taxpayers were pushed by the increasingly excessive taxation of their own state to escape all or part of their income and/or wealth from the tax authorities by transferring it to foreign jurisdictions. According to this vulgate, strongly influenced by the vision that tax havens have given and still give of themselves, the only active agents of this type of tax non-compliance are therefore the tax evaders or avoiders themselves. To use an expression borrowed from the historian Mark Spoerer, tax havens are considered essentially as “passive” agents, as repositories of the capital escaped from tax authorities, their “active” participation being limited to offering these funds—once they have been received—possibilities of valorization in the national economy or on the international market (Spoerer 2004:

10 L’Economiste français, 30 October 1897: 562.

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180). The expressions that have become commonplace—tax “havens”, “refuges” or “oases”—are evidence of the notion that tax havens are the passive, almost involuntary, product of decisions made and implemented by tax evaders or avoiders alone. What we have seen shows that this conception, once again, only partially squares with reality. In fact, a fraction of business circles in several economically developed countries has begun to specialize in setting up instruments designed not only to offer the possibility for possessing classes of other countries to evade or avoid the taxes levied in their respective states but also to induce them to do so. Such specialization has been sufficiently successful—in terms of direct and indirect profits—to interest ever wider sectors of the bourgeoisie and beyond, so that it has become a business or an “industry” in its own right, protected and promoted by the State itself, almost in the same way as relating to the other components of the national economy. It is therefore impossible to fully understand the formation of tax havens, let alone their development, without considering the fact that they are also the products of a deliberate and active policy of important, even central, sectors within the ruling class of certain states (see Ballenegger; Watteyne; van Beurden; Lejour; Fyfe in this volume). These sectors not only respond to demand with supply but tend to go further. As with any market, they also try to create or stimulate demand. In other words, they use taxation as a lever for their own accumulation, siphoning off part of the wealth produced or held in other states and depriving them of the equivalent tax revenues. In this sense, they can be characterized as parasites or predators. A member of French Parliament noted, in 1911, that “the Swiss banks are the leeches of French capital”, and deplored the fact that “our French capitalists […], moved by certain tax fears, deposit their money in Swiss banks”.11 Why did the injured states not prevent the establishment and development of these predatory activities? The question is important because it concerns not only the emergence of tax havens, but their noteworthy longevity and their no less outstanding multiplication from the 1970s onwards. Let us specify that again, it is only possible to sketch out some answers.

11 Maurice Ajam, article entitled “Le nerf [The nerve]” published in the daily newspaper La France militaire, 27 July 1911.

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Many researchers have rightly come to the following conclusion: tax havens could not have survived, let alone developed, if a certain number of states, especially the most powerful ones, had waged a determined and persistent struggle against them. And they agree that the attitude of the latter towards tax havens has been characterized throughout the twentieth century by their “tolerance” (Hampton 1996: 94), “ambivalence” (Eden and Kudrle 2005: 122), “complacency” (Farquet 2016: 470) or “lack of political will” (Palan et al. 2010: 219; Hollis and McKenna 2020: 177). However, it seems to me that the causes of this tolerance have not yet been discussed and identified with sufficient clarity. In this regard, the literature has so far identified two main factors that, by simplifying, can be summarized as follows (Hampton 1996: 68–119; Palan et al.: 153–225; Farquet 2016: 467–471): 1. In the manner of what had happened, in Switzerland, in particular, before the First World War, and no doubt stimulated by the success of the Swiss tax haven, important sectors of the capitalist class in many economically developed countries, including the great powers, in the course of the twentieth century also sought to position themselves in the international tax evasion and avoidance market, in other words, to transform their own states into tax havens (Palan et al. 2010: 111–149). 2. The existence of tax havens has undeniably allowed many capitalists and wealthy individuals as well as many companies to escape from the tax authorities of their own state and thus to increase their accumulation of wealth and, as far as companies are concerned, their rate of profit and thus their competitiveness. In short, as two historians conclude in a recent study: “Administrators in Britain, France, Germany, and the United States all selectively tolerated offshore activity insofar as they believed it contributed to national competitiveness” (Hollis and McKenna 2020: 177). Additionally, any serious fight against the international tax evasion and avoidance market required the adoption of rigorous measures—for example, an extensive financial and even economic boycott of tax havens—that could significantly impede the functioning of the capitalist system as a whole. In the same vein, any struggle by one or a few states against tax havens implied a high risk not only of failure, due to a lack of power, but also of penalizing and thus endangering local companies compared to their competitors established in countries that did not wage such a struggle. To combat tax havens, it would therefore be necessary to form a broad coalition of states, including at least a few of the most

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powerful ones. However, the system of generalized competition that characterizes global capitalism has made and still makes it particularly difficult to set up such a coalition. There is no doubt that these two factors, in part combined, have played a major role. However, a third factor—not or barely mentioned in the existing literature—must be taken into consideration to arrive at a more satisfactory explanation. The famous economist Joseph Schumpeter pointed out the decisive importance of this third factor as early as 1926, when he stated that the existence of “spaces where the tax burden is lower than in other spaces […] is essential […] because only the presence of tax oases automatically curbs demagogic tax excesses” (Schumpeter 1985: 89), a point that his no less famous colleague, the sociologist Max Weber, had made a few years earlier, albeit less explicitly (Morgan et al. 2009: 5–6). In other words, tax havens have been a very effective aid or instrument in the age-old struggle of the possessing classes within their own states to limit the tax burden affecting them, since they have been able to use the threat of transferring their residence or assets to these havens in a very credible way. It should be noted that this factor was one of the causes of the emergence of the earliest tax havens, as well as of those that came later. Thus, to take just one example, in the very long struggle that a large part of the bourgeoisie led in France before the First World War to limit the taxes affecting it, the threat of “capital flight”—which was not only bluff but was amply executed—to nearby countries, in particular to Switzerland and Belgium, played an important role (Frajerman and Winock 1972; Beckert 2008: 260). From the outset and throughout the twentieth century until today, the permanent downward pressure that tax havens have exerted on the taxation of the possessing classes explains in large part the tolerance or benevolence they have enjoyed and, consequently, their longevity and vitality. As a recent study published under the auspices of the US National Bureau of Economic Research points out, this pressure has substantially contributed to the “decline in corporate income tax rates” that has characterized recent decades: “Between 1985 and 2018, the global average statutory corporate tax rate has fallen by about half, from 49 to 24%” (Tørsløv et al. 2018: 1; see also van Beurden and Lejour in this volume). To give a sense of what this means, we can recall that in its latest report on tax havens, the Tax Justice Network estimates the direct annual loss of tax revenue caused by the transfer of multinational companies’ profits to tax

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havens at $312 billion. But the NGO rightly emphasizes the importance of “indirect losses, or spillover costs, [which] arise where governments reduce statutory and effective corporate tax rates to counter the direct losses of corporate tax abuse, with the mistaken belief that this will attract investment. Researchers at the International Monetary Fund estimate that, at a global level, indirect losses from global corporate tax abuse are at least three times larger than direct losses. A similar adjustment here would imply overall losses well beyond US$1 trillion” (TJN 2021: 6). The emergence and development of tax havens have thus had, and continue to have, a return effect on taxation on a global scale, tending to reduce taxation on the possessing classes and, consequently, to increase taxation on other social classes. This aspect constitutes an additional reason to question the vulgate relating to tax havens. It should be remembered that this commonly accepted idea establishes a causal link that is not only decisive but also unidirectional, a one-way link, between the degree of the tax burden and the appearance and expansion of the said phenomenon. In so doing, it hides—undoubtedly not in a disinterested way—this other active and important dimension of tax havens. The conclusion that emerges from the above considerations is clear: the international market for tax evasion and avoidance services, in other words, tax havens, are not extrinsic phenomena of the capitalist system; they are not the manifestation of temporary disturbances of this system, some kind of growths or tumours on a healthy body, as a very large literature likes to present them. They are in line with the deep workings of capitalism and form an intrinsic or organic part of it, “a core component” (Palan et al. 2010: 76) or “a regular and integral […] element” (Ogle 2017: 1433) of it.

The Need for a Rigorous Definition and a Sound Concept of Tax Havens It seems useful to conclude this introduction by briefly discussing the definition of the three main terms that are the subject of this book: “tax evasion”, “tax avoidance” and, especially, “tax haven”. The clear distinction between tax evasion and tax avoidance seems to have emerged in Europe in the decades preceding the First World War, perhaps at different rates in different states, but along the same line of division, i.e., according to whether tax non-compliance was carried out in

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a lawful or unlawful manner, i.e., legally or illegally (see, for example, House of Commons 1906: 108; Guérin 1910: 15–16; Colley 1998). Thus, from a legal point of view, tax evasion is defined as the use of illegal means to escape income or assets from tax authorities, while tax avoidance is conceived as the use of loopholes and/or possible contradictions in legislation and/or deficiencies in tax control in order to reduce the tax burden and is thus considered a legal practice. However, as many researchers have shown since a long time ago (see, for example, Guérin 1910: 15–16; Picard 1914: 496–497; Gordon 1981: 5; Zuppinger 1983: 169; Picciotto 1992: 83–84; Palan et al. 2010: 9–10), in reality, the boundary between tax evasion and tax avoidance has always remained very blurred and porous. Indeed, the kinds of practices covered by one or the other notion have varied greatly in space and time, i.e., according to the evolution of the legislation and its application in each state, which has created a vast grey area between the two. It would take too long to discuss the extent to which the tax evasion and avoidance industry have itself contributed to the creation and preservation of this grey area, nor the extent to which this ambiguity has actually promoted tax non-compliance. We have to content ourselves with simply making this observation. In addition, tax evasion and tax avoidance are basically two very similar phenomena, in particular, because they both result in a loss of tax revenue for the State. In short, it seems to me that scientific research must carefully take into account the difference between tax evasion and tax avoidance when this distinction is necessary for the understanding of a particular historical situation. However, it does not need to do so when it is not necessary and thus spare itself this very delicate and difficult exercise and simply use the notion of “tax evasion” in a broad sense, i.e., including avoidance. As several researchers have noted, the situation is much more confusing and problematic when it comes to the notion of a “tax haven” (see for example Palan 2003: 26; McCann 2006: 12–18; Palan et al. 2010: 17– 45). Firstly, to date, there has been little discussion of the definition of this notion, even within academic research. Secondly, the vast majority of the literature dealing with tax havens, including academic literature, either do not provide a definition of the latter at all or simply gives a rudimentary and vague definition. Thus, to take just one example, a recent study begins, admittedly, by deploring that “widely used though it is, there is no agreed definition of what exactly a ‘tax haven’ is”, but then goes on to provide only a very perfunctory definition: “What we have in

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mind is a low or zero tax rate, combined perhaps with practices that help avoid or even evade taxes due elsewhere” (Keen and Slemrod 2021: 257). Finally, when more substantial and precise definitions are presented, they are almost always characterized by an essentially functionalist approach. They consist of listing the various functions offered or services rendered by tax havens to individuals or companies wishing to escape taxes. Thus, the functionality of these tax havens is made explicit only from the point of view of their users, but not from the point of view of the tax havens themselves, and even less from the point of view of the social forces that promote them. This is in particular the case of the most widespread and influential definition today, the one published in 1998 by the Organisation for Economic Co-operation and Development. It focuses on four “key factors in identifying tax havens”, namely: “No or only nominal taxation on the relevant income is the starting point to classify a jurisdiction as a tax haven”; “strict secrecy rules and other protections against scrutiny by tax authorities”; “a lack of transparency”; “the absence of a requirement that the activity be substantial” (OECD 1998: 23). Favouring an approach that is both functionalist and narrowly legal, such definitions suffer from three major shortcomings: (1) Tax havens are presented as abstract legal constructs, disembodied structures, without any social actors; (2) They do not address the question of what strategies are at work in the constitution of tax havens, which thus appear to be the product of a kind of spontaneous generation; and (3) They emphasize only the passive role of the said tax havens, making them out to merely respond to demand. Thereby, they gloss over their active component, which sets up an offer that acts in a pre-emptive fashion and even seeks to create demand. Therefore, I consider the most rigorous definition provided so far to be the one arrived at by Palan, Murphy and Chavagneux when concluding their study: “We define tax havens as jurisdictions that deliberately create legislation to ease transactions undertaken by people who are not resident in their domains, with a view to avoiding taxation and/or regulations, which they facilitate by providing a legally backed veil of secrecy” (Palan et al. 2010: 236). This definition largely rectifies the shortcomings noted above, since it highlights the historical, intentional and active nature of the phenomenon. In other words, it emphasises the fact that tax havens are not only the product but also the vector of legal provisions and practices

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adopted in a completely deliberate manner. Therefore they relate to strategies, which means, at least implicitly, that social actors are involved. It should also be noted that this definition rightly uses the concept of jurisdiction and not that of state to qualify tax havens, which makes it possible to include territories which, like the cantons in Switzerland, the states in the United States or micro-states, while not possessing all attributes of state sovereignty, still have sufficient autonomy to attempt to play the card of tax competition (Dainoff 2018: 11). However, it seems to me that the definition of the three political scientists could be improved, in particular by explicitly mentioning and characterizing the main social actors involved and by emphasizing more clearly the active and predatory dimension of tax havens. In this sense, I propose the following definition: “Tax havens are jurisdictions that, at the instigation of capitalist sectors at the centre of which are the banking circles, and with the objective of seizing part of the wealth and therefore of the fiscal resources of other jurisdictions, deliberately create legislation and develop practices to ease and encourage transactions undertaken by firms and people, most of which belong to the possessing classes, who are not resident in their domains, with a view to avoiding taxation and/or regulations, which these jurisdictions facilitate by providing a legally backed veil of secrecy”. It would perhaps be useful, for the understanding of the emergence and evolution of tax havens, to complete the above definition by integrating two major distinctions. Firstly, the differentiation between “domestic” tax havens, i.e., jurisdictions that—such as apparently the state of Delaware in the United States—are primarily involved in the national tax evasion and avoidance market and those that could be called “international”, i.e., jurisdictions that participate in tax competition on a supra-national scale (see, in particular, Picciotto 1992: 84–94; Dyreng et al. 2013; Pollack 2013: 53–55). Secondly, the distinction between “multi-skill” (Vernay 1968: 255) or “generalist” jurisdictions, i.e., those with a highly diversified and integrated tax evasion and avoidance industry that has developed a wide range of tax escaping tools, intended, for example, for both natural and legal persons, and those that could be called “specialist” jurisdictions, with a limited industry and a restricted range of such devices (Hampton 1996: 24–33; see also Lejour in this volume). The definition proposed above requires a concept that relates to it. This concept can absolutely not be that of “tax haven”, a notion which has unfortunately become widely accepted, including among researchers,

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but which, as I have noted at the beginning of this introduction, is highly unsatisfactory from a scientific point of view, for at least two reasons. On the one hand, this concept is geographical and not socio-economic or socio-political; it is limited to designating a space, and moreover, a space conceived as a refuge, a shelter or even a sanctuary. It implies, as I have already emphasized on several occasions, the idea of passivity, the said space playing only a role of repository where one comes from outside to find shelter and protection in the face of danger. It therefore omits a major component of tax havens, the activity they deploy to siphon off foreign capital. On the other hand, and above all, this concept is highly ideological, an aspect that stands out even more strongly in the many languages— notably Spanish, French, German or Italian—where the most used notion is that of “paradise (heaven)” (“paraiso fiscal”, “paradis fiscal”, “Steuerparadies”, “paradiso fiscale”), which gives it a religious dimension and an emotional charge that is particularly apt to elicit adherence and sympathy (Shaxson 2015: 72). This concept is perfectly in line with the bourgeois conception of taxation I mentioned earlier and reflects and conveys the view that any tax, however low, affecting the possessing classes tends to be an evil in itself, and that it is therefore fully justified to seek to escape it. Consequently, according to this view, the jurisdictions that offer such protection, or safety, or salvation, as well as those who resort to it, are not only adorned with the cloak of legitimacy but even covered in a mantle of virtue, which is what the notion of “paradise” implies. In this respect, the very genesis of the concept of “tax haven”, or equivalent expressions such as “refuge” or “oasis”, testifies to this highly ideological content. From the outset, the notion of “paradise” or “haven”, i.e., of the good and the right, has been associated with the absence or moderation of taxation affecting the possessing classes. Thus, to my knowledge, one of the very first occurrences of the expression “tax haven” appeared in an article published in 1864 by the Swiss daily newspaper Neue Zürcher Zeitung, which strongly criticized the recent decision of the canton of St. Gallen to slightly increase the taxation of wealthy people, a taxation which nevertheless remained at a level that can be considered, even for the time, as modest (a nominal marginal rate of 3 per cent for the highest incomes). After having noted that “it is not known how long the public will accept such excessive taxation”, the article declared, ironically of course, that the canton had thus become

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a “tax haven (Steuerparadies)”.12 The very few uses of this concept up to the First World War all illustrate a similar view. Describing the tax system in the United Kingdom before 1894, when a small inheritance tax was introduced, Paul Leroy-Beaulieu wrote that “the rich or well-todo man, during that era […] had to pay only very moderate taxes. […] It was a sort of tax haven [paradis fiscal]” (Leroy-Beaulieu 1909: 536). Four years later, an important businessman and the vice-president of the French Senate, Eugène Touron, characterized it as a “tax haven [paradis fiscal]” a state in which “everyone [would] declare only what he wants to declare”.13 The same applies to closely related concepts such as tax “refuge” or “oasis”. Let us recall the quotation, already mentioned above, of the Belgian businessman and member of parliament Louis Franck who, in 1913, described Switzerland and Belgium as an “oasis in the midst of the invasive and often aggressive taxation of the large neighbouring countries” (quoted by Watteyne in this volume).14 It should also be noted that, in recent decades, the expression “offshore financial centre” or a number of other expressions centred on the notion of “offshore” have been increasingly often used as equivalents to that of tax haven, even tending to supplant the latter. This notion, the use of which seems to have been favoured by the tax evasion and fraud industry itself (Hampton 1996: 16; McCann 2006: 27–33), does not seem to me to bring any progress in terms of scientific rigour. On the one hand, it remains an essentially geographical concept, which is limited to designating a space, but a space conceived in an even more restricted way than in the case of the tax haven or tax refuge, since it almost necessarily implies the idea that it is an island. On the other hand, and above all, it no longer refers to taxation: it therefore euphemizes or conceals even more the fact that the phenomena in question relate to tax evasion or avoidance and the predation of wealth and the corresponding tax resources. Consequently, the most rigorous conceptual expression to characterize the phenomena that have been designated until now through the notions of “tax haven” or “offshore financial centre” seems to me to be that of

12 Neue Zürcher Zeitung, 8 November 1864. 13 Speech quoted in Le Temps, 14 December 1913. 14 See also the notice entitled “Tax Refuge in Brussels” published in The San Francisco

Examiner, 23 July 1911.

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“predatory low-tax jurisdiction”. Perhaps the cumbersome nature of this expression constitutes a handicap in the perspective of seeing it replace, at least within scientific research, the notions used until now. This would be a handicap added to the obstacles of the general inertia of the current language and, above all, the material and political interests at stake. So, perhaps it is worthwhile to simplify further by proposing the concept of “low-tax predator”.

References Alink, Matthijs, and van Kommer Victor. 2011. Handbook on Tax Administration. Amsterdam: IBFD. Ardant, Gabriel. 1972. Histoire de l’impôt, vol. 2. Paris: Fayard. Bastiat, Frédéric. 1863 [First edition: 1850]. La Loi. In Oeuvres complètes 4. Paris: Guillaumin. Beckert, Jens. 2008. Inherited Wealth. Princeton, Oxford: Princeton University Press. Becqué, Emile. 1912. L’internationalisation des capitaux. Etude économique, financière et politique. Montpellier: Imprimerie générale du Midi. Birchler, Urs, et al. 2013. The International Private Banking Study 2013. Zurich: University of Zurich, Department of Banking and Finance. Bihr, Alain. 2019. Le premier âge du capitalisme (1415–1763). Lausanne, Paris: Editions Page 2 and Editions Syllepse, 3 Tomes. Bitsch, Marie-Thérèse. 1994. La Belgique entre la France et l’Allemagne 1905– 1914, Paris: Publications de la Sorbonne. Bourdieu, Pierre. 1994. Raisons pratiques. Sur la théorie de l’action. Paris: Seuil. Brittain-Catlin, William. October 2010. Caroline Doggart, Tax Haven Woman. https://www.taxjustice.net/cms/upload/pdf/Doggart_2010_by_Brittain_ Catlin.pdf. Accessed 29 April 2022. Chamber’s Journal. Octobre 1910. Unsigned article entitled “Income-Tax Avoidance”. Colley, Robert J. 1998. The Clown’s Mistress. Income tax evasion: ideal and reality in mid-Victorian Britain relating to the detection of and punishment for evading the income tax. Aberystwyth: Ph.D. of the University of Wales, unpublished manuscript. Cosson, Jean. 1971. Les industriels de la fraude fiscale. Paris: Seuil. Dainoff, Charles, A. 2018. Outlaw Heaven: Why States Become Tax Havens?. Lexington: Ph.D. of the University of Kentucky, unpublished

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PART I

Emergence and Expansion of Tax Havens

CHAPTER 2

The Emergence and Expansion of Tax Havens, 1850–2000: Insights from a New Dataset Sébastien Laffitte

This contribution aims to answer the following question: How and why does a country become a tax haven?1 Despite being major economic actors, little is known about the historical origins of tax havens. The overall picture is as follows: at the beginning of the twentieth century, a small number of modern income taxes were introduced around the world. At this time, a similarly small number of countries were providing offshore services for tax or secrecy purposes. One century later, almost all countries in the world have introduced income taxes and we can count at least forty tax havens, representing around one-fifth of all countries and dependent 1 This contribution is based on Laffitte (2022). It proposes to discuss its foundations and describes some preliminary results.

S. Laffitte (B) ECARES, Université Libre de Bruxelles, Bruxelles, Belgique e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_2

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territories (see Table 1.4, p. 41 in Palan et al. 2010 for a comparison of different lists of tax havens). Tax havens are important actors of today’s globalisation. They are a particular type of territory that commercialises their state sovereignty, id est their capacity to write laws.2 Among countries and territories participating in an aggressive regulatory competition, tax havens are probably the most well-known.3 I adopt here a broad definition of tax havens. I define them as countries that deliberately set up a specific fiscal, legal, and administrative environment in order to attract assets and revenues that have been generated in other countries. This environment is generally characterised by low tax rates on offshore revenues and increased secrecy. Tax havens can target both individuals and corporations. All these countries and territories have their own specialisations in the variety of tax havens’ services that they may offer. It is important to note that tax havens are not just countries with a low tax rate: to become a tax haven, a country has to develop a legal technology that allows its users to move their revenues and assets from other countries. This technology allows the conversion of ‘onshore’ revenues to offshore revenues. This point is crucial to my analysis and will be developed later in this contribution. According to this definition, tax havens encompass different types of countries—from small Crown dependencies in the Caribbean to large sovereign states such as Ireland or Switzerland. Recent research has described the various uses of tax havens. First, some works have pointed out their role in eroding corporate tax revenues (see, for instance, Janský and Palanský 2019, or Torslov et al. 2021). Substantial amounts of profits, at least $300 billion, are shifted each year from the places where they have been generated (and therefore the places that can claim a taxing right on it) to tax havens. This use of tax havens is generally described as tax avoidance (as opposed to tax evasion) because it involves practices that are not necessarily illegal but that may lie in a grey zone. The collection of individual taxes is also affected by the use of tax havens. Alstadsæter et al. (2018) estimate that 10% of the world’s GDP is held in tax havens, this average number hiding large heterogeneities. Tax havens are also used as hosts or conduits of illicit

2 The expression ‘the commercialization of state sovereignty’ is from Palan (2002). 3 So-called ‘pollution havens’ (see for instance Levinson and Taylor 2008) are, for

instance, another example.

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trade flows and financial flows (see, for instance, the review of Cobham and Janský 2020). All these activities, on top of their real effects on public finance, also affect the measurement of key statistical aggregates, thereby biasing public statistics (see, for instance, Zucman 2013 on balance of payments or Guvenen et al. 2018 on productivity). My paper aims to provide a global picture of the emergence of tax havens in the twentieth century. For this purpose, I will first underline the important role played by legal reforms in the making of modern tax havens. This conceptual discussion will guide the construction of a new database on tax havens’ history. Using specialised sources written by tax experts and a large variety of secondary sources, I develop a dataset that traces back the offshore legal history of tax havens until the mid-nineteenth century. For all countries now recognised as tax havens, I collect the year and purpose of each legal reform that aimed at making them tax havens or aimed at reinforcing this status. Then, I offer descriptive evidence about the emergence of tax havens in the twentieth century. This global picture of the expansion of the offshore world reveals geographical heterogeneities in the expansion of tax havens over time. I discuss plausible determinants of these historical and geographic trends. In particular, I put into perspective the increase in the supply of tax havens’ services along the course of the twentieth century with the increase of demand for tax havens, proxied by the taxation in high-tax countries. I propose viewing the expansion of the tax havens’ world in the twentieth century as the expansion of the international tax avoidance and evasion market. I then discuss the determinants that, together with increasing demand, participated in the emergence of the offshore world. In this contribution and in the associated paper (Laffitte 2022), I provide a quantitative analysis of tax havens. By quantitative, I mean that my work aims at illustrating and discussing the global trends of the history of tax havens by using quantitative tools. Such work allows better visual evidence to be provided on the rise of tax havens in the twentieth century. It helps to highlight different trends that would not be observable by focusing on a qualitative analysis. It also allows comparison of these different trends and discussions of the differences and similarities between them. In future work, it will allow a quantitative study of the causes and consequences of the emergence of modern tax havens, complementing the qualitative analysis. It will help in making a comparison of the

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different narratives and in providing an assessment of their relative importance. It can also serve, again as a complement of qualitative history, to test some hypotheses made in previous works. In the first section, I describe the construction of the dataset. I provide a general picture of the emergence of tax havens in the twentieth century in section ‘The Development of Tax Havens’, and I discuss its determinants in section ‘Determinants’. The last section concludes.

The Construction of a Dataset on Tax Havens’ History In order to guide my work, I build a dataset about the history of tax havens. I first highlight the crucial role of legal reforms in making tax havens. Based on this analysis, I describe how I collected data on the legal reforms in tax havens in order to build my dataset. The Role of Legal Reforms In order to guide the data collection, it is necessary to understand what makes a country a tax haven. An important part of tax havens’ activities consists of ‘offering’ regulations to foreign firms and individuals that will allow them to pay less taxes or to shield their revenues from foreign governments. It is then important to note that a low tax rate is not a sufficient condition for being a tax haven. The example of New Caledonia in the 1960s illustrates this. While it was a tax-free French territory, it was not possible to move offshore revenues there, because the law did not allow it (see Rawlings 2004): there was no will to turn this country into a tax haven. As a consequence, being a tax haven is rather a matter of legal features. The following definition of tax havens insists on this feature: a tax haven is an area with a “composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance.” (Powell, cited by Bennedsen and Zeume 2018). This definition highlights that being a tax haven is not only a matter of tax rate but also of “composite tax structure.” More generally, to become a tax haven a country has to put in place a “legal architecture” (Ogle, 2017) that is compatible with hosting offshore revenues. As shown by Pistor (2019), the legal coding of capital is what allows asset holders to shield their assets from taxes: “Capital is inextricably linked to

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law and state power, because in its absence, the legal privileges capital enjoys would not be respected by others” (Pistor 2019, p. 205). As long as a firm or an individual has some latitude in the choice of their legal environment (by moving their assets or opening affiliate companies, for instance), this may create regulatory competition between jurisdictions. Some countries may change their legislation in order to attract foreign assets and (potentially) obtain benefits from it. This process has been described as a result of “the law market” (see Ribstein and O’Hara 2009). In this special market, the demand can be seen as the fact that firms and individuals may be willing to avoid the regulations of a country in which they conduct their activities. In the case of taxation, they demand laws that can offer them lower tax rates than the country in which they primarily pay taxes. The supply can be seen as the enactment by some countries of new laws that aim at attracting these firms and individuals. In the case of taxation, it consists of enacting laws that will allow offshore revenues to be located in the country and shielded from foreign authorities (through bank secrecy or trust structures, for instance). We see tax havens partly as a result of these forces. This view about tax havens also has the consequence that not only does the law of tax havens matter but so does the law of the country from which revenues and assets are moved. Indeed, if it is a legal matter, it can be possible to design regulations to limit the possibility of tax avoidance and tax evasion by increasing tax enforcement. However, this aspect will not be studied here and is left for future research. We can also note that the legal architecture of tax havens varies according to the specific tax haven considered. Tax havens generally specialise in certain types of offshore activities. The legal instruments are numerous and are generally combined by tax havens. This goes from hosting the offshore revenues of individuals through reinforced banking secrecy (in Switzerland, for instance), to firm-level tax rulings (in Luxembourg, for instance: see the Lux Leaks), a low-tax environment for insurance activities (in Bermuda, for instance) or banking activities, an attractive network of tax treaties to allow for treaty shopping (this is, for instance, the case in Mauritius; see also Hong [2018] for a global analysis of the phenomenon), an aggressive trust regulation, or a combination of all these activities. The data collection is therefore based on the idea that tax havens are primarily the consequence of legal reforms. By collecting the data and purpose of relevant legal reforms for each country now recognised as a

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tax haven I can proxy the supply of laws that makes countries tax havens. I explain in the next section how I identify the relevant legal reforms in tax havens. My approach may have the limit of only relying on the legislative environment to identify and describe the emergence of tax havens, but the collection of such data also answers to a practical constraint. Unfortunately, more precise data on assets and revenues located in tax havens does not also allow an important temporal and geographic coverage, while the objective of this project is to cover the maximum number of countries possible along the course of the twentieth century. The construction of such a dataset then faces a trade-off between the level of detail and the coverage. Using more detailed data is crucial to describe some parts of tax havens’ activity, but it does not allow the description of long-term trends at the world level. One may also argue that the supply of tax havens’ services by tax havens may not be intermediated through new legislation, or that my data collection may miss some laws. Firstly, it is true that law cannot completely explain the supply of services by tax havens. This is the case, for instance, if a country writes an inefficient law, the country will not be used as a tax haven while it has enacted such a law. However, despite being of low quality, such a law would still correspond to the objective of supplying tax havens’ services. It is then important to record it in the database. It is also possible that some laws are not observable in my sources, and that I miss some of them. This is especially true for countries that have a long and complex offshore history. This problem also occurs when tracking legislations in federal countries, where tax evasion/avoidance legislation can be enacted at subnational levels (see, for instance, the case of Switzerland, described in Guex 2021).4 In this case, one advantage of my approach which can alleviate this bias is that it will rely on reports written by fiscal lawyers that advise potential users of tax havens. This allows inclusion in my sample of only laws that are perceived by their users to be the most relevant if one wants to use a tax haven. Specifically, this means that the laws not reported might not be that important in the building of the legal structure of the country. Another potential downside of this approach is that it only records the laws and not the practices of the tax authorities. In particular, some tax authorities might be lax when assessing a tax situation that is not

4 Note that my main source discusses the laws in Switzerland at the level of the canton.

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yet observable in law. This is the case, for instance, when tax authorities sign private tax rulings with companies, allowing them to benefit from lower effective tax rates than the statutory rate.5 However, the law generally comes to validate or complement these practices. It seems hard to imagine a tax haven that will only rely on discretionary practices, in particular, because it would provide an uncertain environment to potential avoiders/evaders and to local enablers of tax dodging. If some development of the tax haven may not be intermediated through the law, it is therefore very unlikely that it will never be intermediated through the law. Data To have an idea of the historical development of tax havens, I therefore construct the legal offshore history of countries that are now considered as tax havens. For this purpose, I rely on the list established by Dharmapala and Hines (2009). This list combines different sources to provide a global picture of tax havens around the world. Palan et al. (2010) propose a table that compares 11 different lists of tax havens. The tax havens selected in this study are all present in a majority of these lists. The Netherlands is also added to these lists.6 To identify the legal reforms that are relevant for the data collection, id est those that make countries tax havens or reinforce the set of services they offer, I rely on two types of sources. The main sources are guides written by tax lawyers that aim at describing the opportunities offered by a handful of territories for offshore activities. As lawyers, the authors of these books generally insist on the features of the law

5 For instance, the LuxLeaks (2014) revealed the aggressive tax ruling practices of Luxembourg. 6 It is important to note that the US states of New Jersey and Delaware are not included in this list, while their activities can be interpreted as those of tax havens. These states are, however, generally considered as domestic tax havens for firms (Dyreng et al. 2013), but the recent media leaks have also highlighted their role in the global tax evasion of individuals (see the Pandora papers revelations, for instance; Temkin 2021). Guex (2021) questions the status of tax havens of these states in the early twentieth century. Belgium is not included in the database due to its non-inclusion in the list of Dharmapala and Hines (2009). Guex (2021) and Watteyne (see his contribution in this volume) discuss its role as a tax haven before WWI.

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that allow the use of each territory for offshore purposes. This particularity is important because it helps us to identify the reforms that are relevant. These guides then provide unique cross-country information on offshore opportunities. These books are the Guide Chambost des Paradis Fiscaux (Chambost 2000) and two editions of the Guide Mondial des Paradis Fiscaux (Beauchamp 1992). They are also complemented by Tax Havens Today (Barber 2007) and Tax Havens For International Business (Starchild 1994). In order to cross-check any data obtained using the main sources, I use a variety of secondary sources (reports of the Financial Secrecy Index, Palan et al. (2010), policy reports, country-specific studies, etc.). Because the sources may be partial, each date is (at least) cross-checked in other sources. I end up with 128 reforms in 51 tax havens.

The Development of Tax Havens In this section, I propose descriptive evidence on the expansion of the tax havens’ world in the twentieth century from the use of the database. The first question I can answer from this data is about the timing of the emergence of tax havens. Over the course of the twentieth century, we went from a situation where there were only a few tax havens around the world to a situation where more than a fifth of all countries and territories in the world are tax havens. Figure 2.1 shows the cumulated number of reforms since 1875, distinguishing between the first reforms, which made countries tax havens, and the subsequent ones. The subsequent reforms were used in order to extend, adapt, and modify the legal architecture of tax havens in order to promote their offshore activities. Before the twentieth century, there were few tax havens. Some countries such as Switzerland have a long history of offshore activities. It is important to note that these early tax havens would later enact some reforms to reinforce their offshore activity, as their legal offshore architecture had to be fortified and adapted. In particular, because the political, economic, and legal environment changed throughout the twentieth century, tax havens may have had to adapt their legislation in order to remain competitive. This is a way of interpreting the introduction of banking secrecy in the Banking Law of 1934 in Switzerland: following many initiatives by neighbouring countries to limit the flight of capital, this law gave more protection against these foreign threats

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Fig. 2.1 The emergence of tax havens in the twentieth century (Source Laffitte [2022])

(see Guex 2000) and may also have helped them to be more competitive relative to other emerging tax havens. We do not observe a lot of movement before the First World War, even if some offshore legislations existed, in particular in Switzerland.7 Guex (2021) has argued that even before the interwar period, Switzerland already possessed the characteristics of a tax haven. This is in line, for instance, with the remarks of Hollis and McKenna (2019), who see the First World War as the real beginning of the offshore world, even if the tools used then may have already existed. Following WW1, the first modern direct taxes were introduced in many countries, and with large rates.8 This link between wars and the building of fiscal capacity is well 7 Our database also includes the ‘participation exemption’ enacted in the Netherlands in 1893 as a tax haven reform. However, this law does not seem to have been immediately used for tax avoidance purposes. In any case, little is known about the role of the Netherlands as a tax haven in the early twentieth century, and more research on this topic is needed. 8 Seelkopf et al. (2021) define modern taxation by three distinct features: revenues

capacity (the tax bases of the different modern taxes are broad and not selective, therefore bringing in more revenues than pre-modern taxes), administrative complexity (the modern taxes are administratively intensive and necessitate new requirements for taxpayers and for the tax administration), and redistributive potential (modern taxes are generally progressive and allow the government to influence the distribution of revenues and wealth). These

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documented, at least for European states (see, for instance, Tilly 1990, Scheve and Stasavage 2010, or Besley and Persson 2011). For instance, 27 countries introduced personal income taxes between 1914 and 1924 (while only five countries introduced personal income tax between 1900 and 1914) and the top marginal tax rate in a country like France was 90% in 1924. This likely boosted the demand for tax avoidance services in countries that introduced taxes and then influenced the supply of offshore regulation. A similar pattern is observable following WWII. The trend was stable until the mid-Fifties. At this point, we observe a break in the trend and an acceleration in the increase of the number of reforms. This period saw the simultaneous occurrence of important steps for the history of tax havens. This was the beginning of the deregulation of financial flows (the Eurodollar market, for instance; see Schenk 1998 or Burn 2006) and the scaling-up of multinational firms’ activities, the end of the Bretton Woods system and the beginning of the decolonisation period (see Ogle 2017, 2020, for instance). If the pace seems to have been stable for first reforms, the growth was driven by the increase in the number of subsequent reforms. A hypothesis to explain this is that with the creation of new tax havens, there is a need for those that are already established to update their laws in order to stay competitive. Following this hypothesis, we can, for instance, discuss the case of the Bahamas. It is complicated to find legal footprints of its offshore activity before 1965 when it enacted Swiss-type banking secrecy. Before that, no tax was levied and the country was used as a tax haven, according to different sources (Palan et al. 2010, for instance), but we can interpret the different laws that were introduced in 1965 (the Bank and Trust Companies Regulation Act), 1976 (the Merchant Shipping Act), and 1990 (the International Business Companies Act) as ways to be more productive as a tax haven.

Determinants After having described the development of tax havens in Fig. 2.1, one may ask about its causes. I discuss it in greater length in Laffitte (2022). The causes of tax havens’ expansion are numerous, entangled, and often country-specific. We can, however, try to highlight some of them that modern taxes include, but are not limited to, personal income tax, corporate income tax, value-added tax, sales tax, inheritance tax, and social security contributions.

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are significant and evaluate their relative strength. I will first insist on the role played by the “demand” for tax havens’ services and then discuss other potential determinants, such as geography, decolonisation, and legal systems. The Role of Demand As defined before, the (potential) demand can be proxied by the introduction and increase of taxation by many countries in the twentieth century. Before the introduction of modern taxation in a given country, individuals or firms from this country had a limited interest in demanding offshore services. Once taxation was introduced, especially at the beginning of the twentieth century, when enforcement was less efficient than nowadays (see, for instance, Farquet 2012), the demand for offshore services could increase. If this hypothesis is true, we should observe an increase in the supply of tax havens’ services by tax havens following tax introductions, in order to attract this potential demand. In Fig. 2.2, I plot, by world regions, the cumulated number of tax havens’ reforms by year (dotted line), along with the cumulated number of personal income taxes in force (plain line).9 The data on modern tax introductions come from Seelkopf et al. (2021). Assuming that the demand for tax havens’ services was mostly regional, especially because of important communications costs across countries at the beginning of the century, I proxy the potential demand for tax havens’ services in a given world region by the introduction of direct taxation in this same region.10 For all regions, we observe a similar correlation between a large increase in the number of tax introductions and a subsequent increase in the number of tax reforms. In Europe, before WWI, a few modern direct taxes were introduced. Before this war, there were a few tax havens’ reforms enacted too. During, or following, WW1, several European countries introduced personal income taxes with large bases. A few years after

9 The introduction of corporate income tax follows similar trends and would deliver similar observations. One can note that contrary to direct taxation, evading indirect taxation such as VAT is less likely to necessitate the use of tax havens, explaining our use of direct taxation as a proxy for demand for tax havens. 10 For instance, in 1930, a call of three minutes between New York and London cost 250 dollars (see Huwart and Verdier 2013). Air travel or maritime freight were also expensive.

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Fig. 2.2 Tax introduction and tax havens

this large increase in tax introductions in Europe, we can observe an increase in the number of tax reforms, breaking a flat trend. These observations are similar for other regions. For instance, no tax havens reforms were undertaken in Asia before WWII, while the offshore world was already developed in other places, such as Europe or the Caribbean. We have to wait until a large increase in tax introductions around the time of WWII to see the first tax havens reforms. The Americas are a particular case, where the number of tax havens reforms had a very important growth. This is actually explained by the fact that Caribbean tax havens generally introduced several reforms in a short time period. In Africa and Oceania, the number of tax havens have increased lately, despite tax introductions. This likely means that other factors than demand captured by tax introduction were important in these regions. We can think, for instance, about the role of political and economic instability. If more work is needed to establish causality, this figure suggests that we interpret the large increase in taxation through new taxes observed along the course of the twentieth century as a potential large increase in demand for offshore operations, which have pushed the adoption of

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new tax havens’ regulations. The fact that the trends between supply and demand of tax havens services are correlated within a given region is also suggestive of a regional specialisation of tax havens. Other Determinants If demand appears as an important factor in the development of tax havens, this cannot be the only determinant. In receiving demand for tax haven legislation, some countries may react while others do not. These other determinants are generally pull factors. I briefly discuss some of them in this section. First, geography appears as an important determinant of tax havens. On average, tax havens are more than 70 times smaller than other countries and the largest tax haven in the database, Liberia, is smaller than the median country that is not a tax haven. We can find a simple reason for that. Attracting offshore resources comes at the cost of lowering the domestic tax rate (indeed, tax evaders and avoiders will prefer lower tax rates). A counterpart to the decrease of tax to attract more offshore revenues is the decrease of tax revenues from domestic activity. For large countries, this effect will be large, because the domestic tax base is large, while for smaller countries this effect is small. In this simple example, there must be a size cut-off below which countries gain more offshore tax revenues than they lose domestic tax revenues when they decrease their tax rate, explaining why tax havens are smaller countries on average.11 More generally, the geography of the country can play to its comparative advantages. Small countries may be constrained by space if they need to specialise in industrial activities; islands may face high trade costs and high costs to build trade infrastructure, preventing an efficient importing of inputs, etc. In contrast, the geography needed to develop offshore activities may be less restrictive, and also compatible with a rich clientele that can also benefit from tourism activities.12

11 This simple example assumes that a country cannot have two different tax rates for domestic activities and offshore activities. This is not necessarily true, but the reasoning remains valid as long as the two tax rates are not totally independent. 12 For instance, Guex (2021) insists on the importance of the role played by luxury tourism in the construction of the Swiss tax haven. Chambost (2000), when seeking to give advice on the best tax havens, often discusses the attractiveness of the country for tourism.

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The role of the colonial world and colonial power has also been discussed a lot. The book of Palan et al. (2010) devotes a lot of pages to describe the general emergence of tax havens during the twentieth century. The authors pay great attention to the role of the British Empire in the emergence of tax havens in the twentieth century. This important role has also been described precisely in the recent papers by Ogle (2017, 2020). The role of the British Empire has been crucial in the development of tax havens, through official or non-official ways. Country-specific cases may also enlighten the role of colonisers in making tax havens. Curacao (van Beurden and Jonker 2021) and Vanuatu (Rawlings 2004) are two interesting examples, among others. The specific history of these countries helps us to understand the general emergence of tax havens in the twentieth century. In both cases, the coloniser of the territory has a strong influence on its future as a tax haven. For Curacao, its existence as a tax haven is directly linked to its particular status as a Netherlands’ dependency, and to the fact that it was able to benefit from the Dutch tax treaty with the United States. The coloniser’s role is different for Vanuatu, and reveals the different approaches between colonisers. Before 1980, the country was an Anglo-French condominium known as the New Hebrides. Rawlings (2004) argues that while the United Kingdom’s authorities wanted to turn the country into a tax haven in order to give more economic independence to the territory, the French and Australian ones were reluctant to support this change, fearing that it could impact their tax receipts. The view of the United Kingdom’s finally succeeded and the New Hebrides were turned into a tax haven. This simple anecdotal evidence illustrates how different colonisers’ views can be on the future of their colonised territories, independent or not. The colonial past has also been a determinant of the legal system adopted by a number of former or current colonies. For instance, the great majority of British colonies adopted the common law, while the colonies of other colonial powers such as the Netherlands or France generally adopted civil law systems. Common law has been described as a facilitator of tax avoidance and evasion, compared to other legal systems. For instance, Palan et al. (2010) describe it as “extremely useful in generating loopholes that were used to develop tax havens” (p. 124). This view is also present in Ogle (2017). If we note that some successful tax havens such as Switzerland do not have common law, a large number of current tax havens do have it (66% of tax havens on average, against 22% for other countries). However,

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more precise legal contributions on the specific role of common law in tax avoidance and tax evasion scheme are difficult to find, and these would be needed to make a more conclusive case. More generally, the characteristics of institutions play a role in the making of tax havens. It is important to acknowledge the fact that it is not the quality of institutions in itself that matters but their quality from the point of view of the foreign capital holders. From other points of view, tax havens do not necessarily perform well. For instance, they have, on average, a lower democracy index, according to Polity IV data. Dharmapala and Hines (2009) have insisted on the importance of the role of “governance” by showing that today’s tax havens have, on average, better “governance” than other countries. What they call governance could actually be seen as a specific technology developed by tax havens in order to attract foreign capital by providing stability of the law, a transparent legal environment for capital holders, etc. More research is therefore needed to understand if the reinforcement of institutions that matter for foreign capital holders affects the global quality of institutions in tax havens positively or negatively.13 Finally, the existence of tax havens also depends on frictions in regard to the mobility of capital at the world level. Many papers have insisted on the importance of the Eurodollar markets in spurring the development of the offshore world (Palan et al. 2010; Ogle 2017). Eurodollar markets have hosted transactions in dollars outside of the United States. These transactions were neither regulated by the United States nor by European countries. The offshore world then became a place where regulations on capital could be avoided and different tax havens specialised in dealing with and hosting these transactions. A few years later, the continuous liberalisation of trade and finance that followed the end of the Bretton Woods system in the 1970s may have helped to increase the use of tax havens. Indeed, the Bretton Woods system was associated with capital controls in order to maintain the stability of the system.

13 For instance, Harrington (2016) lists some examples of negative economic and social effects of becoming a tax haven: crime, corruption, economic instability, lack of diversification, inequalities, etc.

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Conclusion In this contribution, I proposed to take a global look at the history of tax havens, using quantitative tools. I have highlighted some trends on the emergence of tax havens in the twentieth century and discussed their possible causes. I confirm, using graphical evidence, that the demand from high-tax countries contributed to the rise of the offshore world in the twentieth century and that this demand has a strong regional component. I have also discussed that if demand can be seen as a push factor, pull factors are also in play.

Bibliography Alstadsæter, Annette, Niels Johannesen, and Gabriel Zucman. 2018. Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality. Journal of Public Economics, in Honor of Sir Tony Atkinson 1944–2017 (162): 89–100. Barber, Hoyt. 2007. Tax Havens Today: The Benefits and Pitfalls of Banking and Investing Offshore. Hoboken, N.J: John Wiley & Sons. Beauchamp, André. 1992. Guide mondial des paradis fiscaux. Paris: Grasset. Bennedsen, Morten, and Stefan Zeume. 2018. Corporate Tax Havens and Transparency. The Review of Financial Studies 31 (4): 1221–1264. Besley, Timothy, and Torsten Persson. 2011. Pillars of Prosperity – The Political Economics of Development Clusters. Princeton N.J.: Princeton University Press. van Beurden, Tijn, and Joost Jonker. 2021. A Perfect Symbiosis: Curaçao, the Netherlands and Financial Offshore Services, 1951–2013. Financial History Review 28 (1): 67–95. Chambost, Edouard. 2000. Guide Chambost des paradis fiscaux. Lausanne: Favre. Cobham, Alex, and Petr Janský. 2020. Estimating Illicit Financial Flows: A Critical Guide to the Data, Methodologies, and Findings. Oxford, New York: Oxford University Press. Dharmapala, Dhammika, and James R. Hines. 2009. Which Countries Become Tax Havens? Journal of Public Economics 93 (9): 1058–1068. Dyreng, Scott. D, Lindsey, Bradley. P. and Thornock, Jacob, R. 2013. Exploring the role Delaware plays as a domestic tax haven. Journal of Financial Economics, 108(3): 751–772. Farquet, Christophe. 2012. The Rise of the Swiss Tax Haven in the Interwar Period: An International Comparison. Working Papers. European Historical Economics Society (EHES).

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Guex, Sébastien. 2000. The Origins of the Swiss Banking Secrecy Law and Its Repercussions for Swiss Federal Policy. The Business History Review 74 (2): 237–266. Guex, Sébastien. 2021. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review, 1–20. Guvenen, Fatih, Raymond J. Mataloni Jr., Dylan G. Rassier, and Kim J. Ruhl. 2018. Offshore Profit Shifting and Domestic Productivity Measurement. Federal Reserve Bank of Minneapolis. Harrington, Brooke. 2016. Why Tax Havens Are Political and Economic Disasters. The Atlantic, 28 July. Available at: https://www.theatlantic.com/bus iness/archive/2016/07/tax-haven-curse/491411/ Hollis, James, and Christopher McKenna. 2019. The Emergence of the Offshore Economy, 1914–1939. In Capitalism’s Hidden Worlds, 157–78. University of Pennsylvania Press. Hong, Sunghoon. 2018. Tax Treaties and Foreign Direct Investment: A Network Approach. International Tax and Public Finance 25 (5): 1277–1320. Huwart, J. et L. Verdier. 2013. Economic Globalisation: Origins and Consequences. OECD Insights, Paris: OECD Editing. Janský, Petr, and Miroslav Palanský. 2019. Estimating the Scale of Profit Shifting and Tax Revenue Losses Related to Foreign Direct Investment. International Tax and Public Finance 26 (5): 1048–1103. Laffitte, Sebastien. 2022. The Origin of Tax Havens: A Quantitative Approach. Mimeo. ENS Paris-Saclay. Levinson, Arik, and M. Scott Taylor. 2008. Unmasking the Pollution Haven Effect*. International Economic Review 49 (1): 223–254. Ogle, Vanessa. 2017. Archipelago Capitalism: Tax Havens, Offshore Money, and the State, 1950s–1970s. The American Historical Review 122 (5): 1431–1458. Ogle, Vanessa. 2020. ‘Funk Money’: The End of Empires, The Expansion of Tax Havens, and Decolonization as an Economic and Financial Event*. Past & Present 249, no. 1: 213–49. Palan, Ronen. 2002. Tax Havens and the Commercialization of State Sovereignty. International Organization 56 (1): 151–176. Palan, Ronen, Richard Murphy, and Christian Chavagneux. 2010. Tax Havens: How Globalization Really Works. Ithaca, N.Y: Cornell University Press. Pistor, Katharina. 2019. The Code of Capital: How the Law Creates Wealth and Inequality. Princeton: Princeton University Press. Rawlings, G. 2004. Laws, Liquidity and Eurobonds: The Making of the Vanuatu Tax Haven. Journal of Pacific History 39: 325–341. Ribstein, Larry E., and Erin O’Hara. 2009. The Law Market. Oxford, New York: Oxford University Press.

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Scheve, Kenneth, and David Stasavage. 2010. The Conscription of Wealth: Mass Warfare and the Demand for Progressive Taxation. International Organization. 64 (4): 529–561. Seelkopf, Laura, Moritz Bubek, Edgars Eihmanis, Joseph Ganderson, Julian Limberg, Youssef Mnaili, Paula Zuluaga, and Philipp Genschel. 2021. The Rise of Modern Taxation: A New Comprehensive Dataset of Tax Introductions Worldwide. The Review of International Organizations 16 (1): 239–263. Starchild, Adam. 1994. Tax Havens for International Business. Basingstoke: Palgrave Macmillan. Temkin, J. 2021. The Pandora Papers Shed New Light On The U.S. As A Tax Haven. Forbes. 12 October. Available at: https://www.forbes.com/sites/ insider/2021/10/12/the-pandora-papers-shed-new-light-on-the-us-as-a-taxhaven/?sh=3d1475d21f59 Tilly, Charles. 1990. Coercion, Capital, and European States, A.D. 990–1990. Revised. Cambridge, MA: Wiley-Blackwell. Torslov, Thomas, Ludvig Wier, and Gabriel Zucman. 2021. The Missing Profits of Nations. NBER Working Paper. Zucman, Gabriel. 2013. The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors? The Quarterly Journal of Economics 128 (3): 1321–1364.

CHAPTER 3

Emergence and Expansion of the Swiss Tax Haven: The Tax Privileges for Rich Foreigners in the Canton of Vaud, 1840–1959 Vivien Ballenegger

“Let’s leave the moral issue aside and get down to business”: Arthur Randin, banker and deputy of the Liberal Party, 1947.1

It is well established that the special tax provisions designed to induce wealthy foreigners to establish their residence in Switzerland were historically a part of the components of the Swiss tax haven (Guex 2022). The 1 This intervention takes place in the context of the parliamentary debates on the

taxation of foreign residents. See Bulletin du Grand Conseil du canton de Vaud (BGC), 16 December 1947, p. 1207.

I would like to thank Sébastien Guex for his great help in writing this article. V. Ballenegger (B) University of Lausanne, Lausanne, Switzerland e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_3

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cantons of Geneva and Vaud played pioneering roles in this respect. It is also established that these two cantons were—and still are—the primary beneficiaries.2 However, the history of these provisions is still exceptionally poorly known, even less than that of the measures put in place to attract companies (van Orsouw 1995; Farquet 2018, 24–26, 52, 101– 103, 146–147, 156–157). For the period before the First World War, the link between the tax provisions, designed to attract wealthy foreigners, and the tourist industry, or the names of the cantons that provide for such provisions, is barely known in the historiography (Guex 2022, 360). This article aims to fill this gap in part by studying the special tax regime in Vaud that allowed—and still allows—wealthy foreigners who are residents or domiciled in the canton to pay little or no tax on their movable assets and income.3 This paper makes four contributions. Firstly, it provides a numerical overview of the (large) number of foreigners benefiting from the special tax regime in the canton of Vaud and the (meagre) tax revenues it generated. Secondly, it explains why and how tax measures were taken, from 1840 onwards, to attract wealthy foreigners to the canton on a long-term basis. Thirdly, it shows how the ruling circles, faced with the solid internal opposition that these measures aroused at the end of the First World War, slightly reformed the tax regime reserved for wealthy foreigners by introducing the so-called ‘Foreigners’ Tax’, or the ‘forfait fiscal’, which is lump-sum taxation. Finally, it explains how, at the end of the Second World War, the Vaud authorities managed to maintain a special tax regime for wealthy foreigners at the cantonal and federal levels, despite the opposition of a section of the country’s ruling class.

Some Figures For the period preceding the First World War, no precise statistics are available on the number of foreign residents benefiting from the special tax regime instituted by the Vaud authorities. At most, to give an order 2 In 1949, the Federal Tax Administration (FTA) estimated that the number of foreigners benefiting from such provisions was 1500 in the canton of Vaud, 1000 in the canton of Geneva, and 80 in all other cantons (Gubler 1949, 98). 3 Two clarifications. Firstly, in the rest of the text I use the term residence, which includes domicile. Secondly, real estate wealth tax is not affected by the special tax regime dealt with in this article.

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of magnitude, we can say that their number reached several hundred in the last third of the nineteenth century and increased significantly during the first decade of the twentieth century, exceeding a thousand.4 Since the introduction of the ‘Foreigners’ Tax’ in 1918, relatively reliable and homogeneous data on the number of foreign residents benefiting from tax privileges are available, as shown in Fig. 3.1. The high figure for 1918—around 3200—is probably explained by the reception of many war-wounded, mainly French and English, a substantial element of whom came from the upper classes of society (Favre 1917, vol. 1, 54– 56, 157–160; 1918, vol. 2, 75–77, 231–236; 1919, vol. 3, 82, 191–192, 196–198, 249). However, this number declined rapidly and sharply under the combined effects of returning these wounded to their country of origin and the economic crisis of 1920–1923. It then rose again, reaching a plateau from 1926 onwards—around 1000 residents, or about 0.3% of the canton’s population—until the Second World War. With the Second World War and the influx, again, of war-wounded, the curve began to rise again (Ludwig 1957, 303). It stabilised at an average level of 1550 taxpayers (about 0.4% of the population) during the post-war period, i.e. an increase of about 50% compared with the level reached during 1926–1938. Until the First World War, the little information available on the nationality of these taxpayers indicates that they came mainly from France, the British Isles, and the Russian Empire, and secondarily from the Netherlands, the United States, and Germany.5 This composition did not seem to change much during the inter-war period, except for nationals from Russia, whose presence probably dropped following the 1917 Revolution.6 After World War II, the colonies of Greece and Romania completed this cohort.7 4 Results of the Federal Population Census of 1888 (vol. 3, published by the Federal Statistical Office in 1894, p. 65) and of 1910 (vol. 3, published by the Federal Statistical Office in 1919, p. 89). See also BGC, 23 November 1906, p. 194. 5 BGC, 30 May 1862, pp. 579–580 and the report in: annex, p. CXXIII; Letter from the English Vice-Consulate to the Head of the Finance Department, 27 May 1892, VCA, K X a 46/538, file n° 629; BGC, 23 November 1906, p. 194; Jogarajan 2012, 283–306. 6 Report of the Tax Administration on the Motion Guhl & Co, 1 April 1933, VCA, S 272/139; BGC, 20 November 1934, p. 506. 7 Dossier on the Vogelsang Motion, Report by J[ean] B[rack] entitled ‘Révision du régime d’imposition des étrangers dans le canton de Vaud’, 13 July 1950, VCA, S 172/109.

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3,500

1.20%

3,000

1.00%

2,500

0.80%

2,000 0.60% 1,500 0.40%

1,000

Resident foreigners

1956

1954

1952

1948

1950

1946

1942

1944

1938

1940

1936

1934

1932

1930

1926

1928

1924

0.00% 1922

0 1920

0.20%

1918

500

As a % of the population of Vaud

Fig. 3.1 Evolution of the number of resident foreigners benefiting from the ‘Foreigners’ Tax’ or the ‘forfait fiscal’ (1918–1956) (Sources BGC, 8 November 1920, p. 33; List of taxpayers subject to the Foreigners’ Tax, 1921–1947, Vaud Cantonal Archives (VCA), Chavannes-près-Renens, K X a 174; Gubler 1949, 98; Letter from the Lausanne District Commission to the FTA, 8 March 1950, Swiss Federal Archives, Berne, E6302B#2003/1#521*; FTA, Monthly report. Tax for national defence, 8th period. Canton of Vaud, 7 May 1956, VCA, SB 163/26, p. 4. Share of the canton’s population, calculated from figures provided by Lorusso [1989, 25–27])

Figure 3.2 traces the evolution of tax revenues generated by the tax system from wealthy foreigners between 1918 and 1960. It can be seen that on average over the whole period, this revenue constituted a very marginal share of total direct tax revenue, which from 1920 onwards fluctuated between 0.5 and 1.8%, and was even lower before the First World War. This finding confirms that the purpose of the tax provisions specifically designed to attract wealthy foreigners to the canton was not to fill the state coffers.

Why Attract Wealthy Foreigners? The main reason for the emergence, consolidation, and defence by the canton of Vaud of the special tax regime for wealthy foreigners lay in the structure of its economy, which was very strongly oriented towards

3

EMERGENCE AND EXPANSION OF THE SWISS TAX HAVEN …

9,00,000

59

3.50%

8,00,000

3.00%

7,00,000 2.50%

6,00,000 5,00,000

2.00%

4,00,000

1.50%

3,00,000

1.00%

2,00,000 0.50%

1,00,000 0 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960

0.00%

Constant francs (1940)

Share of direct taxes

Fig. 3.2 Tax revenues generated by the preferential tax regime (Sources Accounts of the canton of Vaud, published in: Compte rendu du Conseil d’Etat, 1918–1960)

the luxury tourism sector. As the Head of the Department of Finance pointed out in 1906, ‘our strongest gain is the foreigners’ industry […] we have found a real seam […] Our entire economic system [that of the canton of Vaud, author’s note] is oriented in this direction’.8 Tax exemptions were intended to encourage the long-term stay of wealthy foreigners, with three objectives. The first was to promote the long-term occupation of the region’s tourist infrastructure by a wealthy clientele, as succinctly stated in a remark made during the drafting of tax reform in 1947: ‘Transient foreigners, less interesting—limited!’.9 In this respect, it should be emphasised that tax allowances compensated for the very high rates charged by hoteliers, as a member of the Committee of the Vaud Chamber of Commerce and Industry stated in 1949: ‘If hotel rates

8 BGC, 23 November 1906, p. 187. 9 “Loi d’impôt du 24 janvier 1923. Projet de modifications”, undated [1947], VCA,

K X a 399/1.

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are high, we should not add taxes to them’.10 This mechanism, which can be characterised as a transfer of revenue from the State’s coffers to hoteliers, became even more evident with the introduction, as early as 1923, of an additional tax deduction of 50% for foreigners domiciled in hotels.11 The second objective was to benefit from the attraction effect that wealthy residents had on their fellow human beings. As Julien Dubochet, a private banker and member of the board of directors of several transport companies linked to tourism put it in 1885, ‘Foreigners who stay attract foreigners who are passing through’.12 In addition, the arrival of wealthy foreigners nourished the business networks and influence of the regional ruling class. In August 1887, the notary Rodolphe Mayor, referring to the former President of the Council of Ministers of the French Republic, Charles de Freycinet, who was seeking to settle in the canton, noted that ‘in the high position he occupies, he will be able to do great good to our country in many respects, where he is likely to attract friends and acquaintances’.13 Finally, the attraction of wealthy people fed the wealth management business of bankers, notaries, and specialised lawyers (Humair et al. 2014, 366–368). In this respect, it is worth noting that the influx of foreign capital was also likely to finance regional industry, explaining the tax regime’s favourable view of wealthy foreigners by all the canton’s capitalists.

The Tax Exemption of Wealthy Foreigners at the Heart of the Emergence and Development of Wealth and Income Taxation (1840–1916) From the second half of the nineteenth century onwards, a growing number of economically developed countries introduced income taxes, while from the 1890s onwards, the ‘transnational movement’ calling for the introduction of progressive taxation gained in importance, thanks 10 Minutes of the Committee of the Vaud Chamber of Commerce and Industry, 21 January 1949, VCA, PP 845/44. These very high rates were reflected in the considerable profits generated by the hotel companies (Humair et al. 2014, 359–366). 11 Recueil des lois, décrets, arrêtés et autres actes du gouvernement du canton de Vaud, 1923, Law of 24 January 1923, Art. 13. 12 Assemblée constituante, 17 January 1885, p. 172. 13 Letter from R. Mayor to the Head of the Finance Department, 6 August 1887,

VCA, K X a 46/489.

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to the rise of the ‘reformist or revolutionary parties’ (Delalande 2011, 132; see also Ardant 1971, 78–79) of the labour movement. Switzerland was no exception to this movement and a growing number of cantons, which enjoyed a monopoly on direct taxation, introduced the same type of taxes (von Schanz 1890, vol. 1, 38–42; de Cérenville 1898, 50–51; Schmid 1940, 10–19). The development of direct taxation in several tourist-oriented cantons included provisions that exempted foreign residents at the same time as the new tariffs were introduced. In practice, foreign residents paid almost no taxes until the First World War. Geneva was a pioneer as early as 1816. The Vaud authorities authorised certain tourist municipalities to introduce taxes with similar provisions as early as 1840 before the canton itself took the step in 1862. Four other tourist cantons followed: Neuchâtel, Graubünden, Ticino, and Luzern (Guex 2022, 360). Through the example of the canton of Vaud, this section shows how such conditions were introduced and then maintained until the First World War, despite the opposition they aroused. The introduction of taxes on income and movable assets that would spare foreign residents from contributing resulted from two social forces at communal and cantonal levels. On the one hand, there were recurrent popular demands for a fairer distribution of the tax burden, particularly for introducing and strengthening taxation on movable assets (von Schanz 1890, vol. 4, 113; Arlettaz 1980, 550–560; Longchamp 2001). On the other hand, the development of luxury tourism required the creation of costly infrastructures, which the promoters wanted to be financed, at least in part, by the public authorities (Humair et al. 2014, 29–42, 81– 81, 87–89, 124–146, 171–183). These two social forces agreed to grant more resources to the communities through tax reform. However, they disagreed with the design of the tax reforms, particularly on the principle of equality before tax. Indeed, the ‘foreigners’ industry’ wanted wealthy foreigners living in the region long-term to be exempt from the new tariffs. In December 1840, the parliament of the canton of Vaud—known as the Grand Council—authorised the commune of Vevey, which was then in the midst of a major tourist boom, to levy a tax on income and movable assets.14 The law’s final version incorporated an exemption similar to

14 BGC, 14 December 1840, pp. 650–654 and 17 December 1840, pp. 820–824.

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Geneva’s in 1816.15 It provided that ‘foreigners who do not carry out any industry [i.e. gainful activity, author’s note]’16 in the region were exempt from the new tax without a time limit. The Vaud authorities granted the same authorisation to several other communes in the following years.17 To finance the development of railway infrastructures essential to the development of tourism in particular, and to respond to progressive solid tax demands that capital should also participate in the financing of public services, in 1850 the Vaud authorities drew up a first bill providing for the introduction of a tax on movable assets and income at the cantonal level. This bill included an exemption of the same type. However, it was rejected by the Grand Council in May 1854.18 It was not until 1862 that a cantonal wealth and income tax was introduced (Longchamp 2001, 71–77, 104–110). The 1862 Law contained an article stipulating that ‘Foreigners to Switzerland who do not carry on any industry in the canton are subject to tax only after two years of residence, and only for the movable assets they possess in the canton.’19 The text of the law thus provided for the exemption of wealthy resident foreigners, but only for a limited period. This limitation was probably explained by the progressive solid tax demands of some of the canton’s peasantry at the time (Longchamp 2001, 28–29). However, what the promoters of the tourist industry could not obtain from the Grand Council, namely an exemption without a time limit, they were to realise through the (non-)application of the law. As soon as the law came into force, the Central Commission, the final authority of appeal in matters of movable property tax, decided, contrary to the ‘literal meaning’ of the text of the law, that by ‘movable property that they possess in the canton’, it had to be understood ‘that only the movable property, dead or alive, furnishing the flats or houses, to the exclusion of any kind of securities, debts, or shares, as well as cash, is subject to the tax’ (Correvon, 1910, 145). This meant that, in practice, wealthy foreigners residing in

15 On the exemption provided by the Geneva law of 1816, see Vuy (1838, 18–19). 16 BGC, 14 December 1840, pp. 653–654, see also in: Idem, 17 December 1840,

pp. 820–824. 17 Rolle in 1847, Morges in 1848, Le Chenit in 1849 and Lausanne in 1857 (on condition, however, that no property was owned in the commune). 18 See appendix of the BGC, Spring 1850, p. 718 and 30 May 1854, pp. 272–273. 19 Recueil des lois…, 1862, Law of 21 August 1862, Art. 2, letter a.

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the canton and not engaged in gainful employment were virtually exempt from income and wealth tax. In the mid-1870s, the tax regime for wealthy foreigners was seriously challenged for the first time. Some of the agricultural and wage-earning sectors, whose tax burden was increasing, demanded a better social distribution of tax.20 In this context, in January 1875, the Head of the Finance Department acknowledged that, because of the tax privilege reserved for foreign residents, ‘considerable fortunes escape taxation’.21 Nearly three years later, at the end of 1877, the Grand Council discussed a government tax reform bill, limiting the tax regime for wealthy foreigners.22 However, the majority of the Grand Council, following the reasoning of the canton’s tourist industry interests, rejected the government’s proposal. Contrary to the hopes of the promoters of the luxury tourism industry, the challenge to the tax regime for wealthy foreigners did not die out. It led to the tax regime reform for wealthy foreigners in a significant tax overhaul in 1886. Due to the long-lasting opposition of the advocates of greater tax justice, the defenders of the special tax regime were forced to back down a little: the 1886 reform provided for a ten-year limit on the duration of the special tax regime for wealthy foreigners.23 However, the concession was only formal: it was never implemented, since at the end of the first ten years, in 1896, this period was extended by another ten years, a manoeuvre that was repeated in 1906.24 In short, as the Head of the Department of Finance of the canton of Vaud laconically pointed out in 1919, ‘until 1917, foreigners who lived in the canton, without exercising a profession [or] an industry, were not subject to any tax’.25

20 BGC, 21 January 1875, pp. 168–185 and related appendices; see also Schanz (1890, vol. 4, 133–134). 21 BGC, 21 January 1875, p. 176. 22 BGC, 21 November 1877, pp. 36–43; 17 December 1877, pp. 338–339 and 20

December 1877, p. 386 with the related appendix. 23 Recueil des lois…, 1886, Law of 21 August 1886, Art. 20. 24 BGC, 11 and 14 November 1896, pp. 117–121, 197; 23 and 26 November 1906,

pp. 185–205, 234–235. 25 BGC, 11 November 1919, p. 129.

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The Lump-Sum Taxation: A Product of the First World War (1918–1946) The earthquake that was the First World War changed this situation, but only slightly. Indeed, as early as 1918, the canton of Vaud, taking the example of Geneva, which had introduced such a change in 1916, began to tax wealthy foreigners by introducing a lump-sum tax system, i.e. a tax levied on the presumed resources of taxpayers. But this tax remained exceptionally modest. Let us take a closer look. From the second half of the First World War onwards, the canton of Vaud saw the system of taxation reserved for wealthy foreigners being strongly questioned by both the Socialists and representatives of the peasantry. For example, in September 1917, for the first time, a Socialist motion was tabled in the Grand Council calling for ‘the elimination of exemption privileges for foreigners in Switzerland’.26 If it were carried only by the Socialists, this motion would not have alarmed the promoters of the tourist industry, as the Social Democrats only occupied 10% of the seats in the Grand Council (Meynaud 1963, 258). However, agricultural circles, which did not want to be the sole bearers of the financial burdens resulting from the war, supported the Socialist motion.27 This was much more worrying for the defenders of tax privileges, since the peasant representatives made up a large proportion of the deputies of the Radical Party, the main political party in the canton, with 64% of the seats in the Grand Council. As another example, even the Finance Committee of the Grand Council considered that the time had come for ‘the participation of all foreigners in paying taxes’.28 In such a context, the government twice used the extensive powers at its disposal due to the war context (full powers) to impose its will on the taxation of foreigners.29 First, in 1916, it extended by two years the

26 BGC, 6 September 1917, p. 813. 27 See the intervention of the influential radical MP Albert Wulliamoz in: BGC, 19

November 1917, p. 147. 28 Report of the Finance Committee on the 1916 accounts, published in: BGC, 3 September 1917, pp. 490–504, here p. 504. 29 The Grand Council grants the Government full powers in August 1914. See: BGC, 24 August 1914, pp. 201–208 and the related appendix.

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period after which foreigners were supposed to be subject to the ordinary tax system.30 Second, in May 1918, it introduced the ‘Foreigners’ Tax’, a personal tax on foreigners who escaped the regular tax system.31 This tax, which was levied on the presumed resources of these people without their having to file a tax return or undergo any control by the tax authorities, had ‘the great advantage of being able to be applied practically’ and ‘not bothering these taxpayers’, as the liberal lawyer Jean de Muralt pointed out.32 At the end of November 1918, the Grand Council voted to integrate the ‘Foreigners’ Tax’ into the Vaud tax system, with a further two-year postponement of the period, after which they were supposed to be subject to the ordinary tax system.33 The ‘Foreigners’ Tax’ had the appearance of progressivity: its rate was between 0.5 and 5%, depending on the level of presumed resources. However, due to the highly lax taxation procedure that led to the determination of the ‘presumed resources’, the latter corresponded to only a fraction of foreigners’ actual income, which strongly attenuated the progressivity of the tax and even made it degressive for the highest incomes. By way of comparison, for ‘ordinary’ taxpayers, the maximum tax rate on the return on movable assets was 12% (calculated for an asset earning 5% interest). The acceptance of this meagre tax by the agricultural and Socialist circles’ representatives was because several other tax demands that they put forward were satisfied, particularly the sharp increase in the threshold from which income tax was applied, which relieved those with a modest or average income. In 1923, in a political context that had become significantly more favourable to bourgeois forces, the Vaud tax system underwent a significant reform that favoured the wealthy classes: it lightened the tax burden on companies and lowered the tax threshold. Within this reform, the main lines of the ‘Foreigners’ Tax’ were maintained, but with three modifications. The first was the most striking: it left the government with the power to set the ‘Foreigners’ Tax’ rates and related taxation procedures.34 That the definition of these two central aspects of any tax 30 Recueil des lois…, 1916, Order of 4 December 1916. 31 Recueil des lois…, 1918, Order of 31 May 1918. 32 BGC, 19 November 1917, p. 149. 33 BGC, 28 November 1918, pp. 290–295, 308. 34 Recueil des lois…, 1923, law of 24 January 1923, Art. 13.

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system was not a matter for parliament but rather for the government was an unusual aspect of Vaud’s tax legislation. By decree, the government decided shortly afterwards to maintain the same scale as the one fixed in 1918, with a maximum rate of 5%, whereas the top marginal rate for ‘normal’ taxpayers was then 17%. The same decree also maintained the extremely lax taxation procedure of the ‘Foreigners’ Tax’, guaranteeing the ability of foreigners to ‘verbally provide [their] explanations’.35 The second change introduced by the 1923 tax reform was a new feature to encourage wealthy foreigners to stay in the canton’s hotels. If they stayed in hotels or guesthouses, their tax was reduced by 50%, which meant that the maximum rate was 2.5%. The third change was to reduce the period when wealthy foreigners could benefit from the special tax regime to five years. However, as had been the case since 1886, this period was systematically extended and, in fact, never respected. As early as 1927, the method of assessing the taxable income of wealthy foreigners who chose to be taxed ex officio was formalised and has remained, in essence, in use throughout the twentieth century until the present day. This method, which was inspired by the Geneva law of 1916, consisted of multiplying the rent of their accommodation by five (or four if the taxpayer was a landlord). In the case of hotel residences, the price of their board was multiplied by 1.6 to estimate the level of their income (then taxed with the 50% deduction reserved for hotel guests).36 This lump-sum taxation, known as the ‘forfait fiscal’, formalised the ‘Foreigners’ Tax’ principles, which resulted in the determination of a taxable amount that constituted only a tiny fraction of real income, particularly for highly wealthy taxpayers. As the Head of the Finance Department pointed out in December 1947, the lump-sum taxation system allowed ‘foreigners with a vast fortune in Switzerland, who have been living here for ten, twenty or thirty years’ to pay ‘virtually no tax’.37 The head of the canton’s finance department illustrated this by referring to the case of a resident foreigner who paid 62.5 francs in tax on

35 Recueil des lois…, 1923, order of 20 March 1923. 36 Forms entitled “Taxe des étrangers” and “Indication des Ressources”, undated, and

report by the tax authorities entitled “Notes sur motion Guhl et consorts…”, 18 February 1933, VCA, S 272/139, File on the Guhl Motion. 37 BGC, 1 December 1947, p. 470.

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a fortune of 255,000 francs, i.e. an effective tax rate on the income from this fortune of about 0.5%.38

The Effects of the Second World War: A Minimal Revision of Lump-Sum Taxation (1947–1959) At the end of the Second World War, the lump-sum tax system was again under fire. Unlike during the First World War, however, the opposition no longer came from the Socialists and representatives of the peasantry, but from the federal authorities, who felt that the tax dumping as practiced by certain cantons, primarily Vaud but also Geneva, went too far. To understand the following developments, it is necessary to digress to state that, since the First World War, the Confederation had introduced a tax on income and wealth, which was thus added to the direct taxes levied by the cantons. However, since its introduction, this federal taxation had also remained very low for wealthy foreign residents because it was partly based on principles similar, if not identical, to the lump-sum taxation system practised in various cantons, including Vaud (Honegger 1942, 29–37; Verrey 1948, 167–169).39 This was made possible by accommodating federal tax legislation, by the laxity of the cantonal tax authorities in charge of collecting the federal tax, and by the tolerance of the federal tax authorities, which did not rigorously control the taxation decisions of the cantonal authorities. In 1947, the federal authorities thus had a straightforward way of limiting the under-taxation of wealthy foreigners living in the country: by no longer tolerating the overly generous application of the lump-sum tax by the cantonal tax administrations at the level of direct federal taxation. The FTA demonstrated this change of policy by filing around fifty appeals against taxation decisions of the Vaud (about 30 requests) and Geneva (about 20 requests) authorities (Verrey 1948, 170; Tschumper 38 Idem. 39 See also: Journal de Genève, 4 June 1921; Reports by J[ean] B[rack], a jurist working

for the Finance Department, entitled “Révision du régime d’imposition des étrangers dans le canton de Vaud”, 13 July 1950 and “La situation fiscale des étrangers résidant dans le canton de Vaud (région Montreux-Vevey) pour s’y soigner ou s’y reposer”, 23 January 1950, VCA, S 172/109, File on the Vogelsang Motion.

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1953, 118–119). Although the Vaud and Geneva authorities rejected the FTA’s appeals, the latter brought the case before the Federal Court, which ruled in its favour on 12 November 1948.40 Under such pressure, the Vaud authorities drew up a reform of the lump-sum taxation of wealthy foreigners. In close collaboration with the tourist industry and in agreement with the Geneva authorities, the Vaud authorities aimed to impose a new minimum standard for lump-sum taxation that would be accepted nationally, i.e. at the level of both direct federal taxation and cantonal taxes.41 The Vaud tax reform was carried out very quickly and was completed by the end of 1947.42 The central principle of the new law was that Swiss securities belonging to a foreign resident benefiting from the lump-sum taxation system were to be taxed according to the ordinary tax system, i.e. as if they belonged to a Swiss or an ‘ordinary’ foreign resident. Therefore, this slight tightening concerned a minority of foreign residents, since only 25% of them held Swiss securities.43 For 75% of foreign residents, nothing, or almost nothing, changed, since the reform only increased the maximum tax rate by one percentage point, i.e. from 5 to 6% (3% in the case of hotel stays). In contrast, the maximum ordinary tax rate was 20.4%. Moreover, the 1947 law contained a departure from the principle it introduced. Indeed, its deliberately ambiguous wording allowed the authorities to offer a 50% discount on the ordinary taxation of Swiss securities held by foreigners residing in hotels. This vague wording was found in Article 13 of the new law, which provided that ‘foreigners may, however, request to be subject […] to a special tax […] The tax is reduced by half for foreigners living in hotels or guesthouses. […] This special tax shall not, however, be less than the tax that would be due, by the present law, on the assets constituted by movable objects in Switzerland and by Swiss securities’.44

40 Recueil officiel des Arrêts du Tribunal fédéral, vol. 74, I, judgement of 12 November 1948, pp. 285–295. 41 Minutes of the extra-parliamentary committee, 26 June 1947 and 19 August 1947, VCA, K X a 399/1. 42 BGC, 1 December 1947, pp. 454–471; 16 December 1947, pp. 1203–1222. 43 BGC, 15 May 1951, p. 292. 44 Recueil des lois…, 1947, law of 16 December 1947, Art. 13.

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However, the canton of Vaud was very cautious about how it intended to interpret this ambiguous passage of the law. On the contrary, it emphasised that the lump-sum taxation system should no longer make it possible to escape the ordinary tax due on Swiss securities. By introducing this principle, the canton of Vaud—and the canton of Geneva—hoped to mitigate the criticism of the lump-sum taxation system and maintain this system at both cantonal and federal levels. To this end, the cantons of Vaud and Geneva acted in two stages.45 First, they tried to get the other cantons—which were in the process of drawing up a Concordat to limit tax dumping in Switzerland (Schmidt 1959, 133–134)—to accept the principle we have just seen (that the lump-sum tax for resident foreigners may not be less than the ordinary tax on the Swiss securities they hold). Their endeavour was successful, and the said principle was therefore incorporated into the Concordat, the final version of which dates from 10 December 1948.46 The cantons then had ten years to adapt their tax legislation and ratify the Concordat. In a second phase, the cantons of Vaud and Geneva succeeded in imposing the reformed lump-sum taxation, this time at the federal level.47 They used the Concordat as a blunt instrument: why would the federal authorities not accept a system accepted by all the cantons? Worse, Vaud and Geneva threatened to derail the Concordat by refusing to ratify it if the lump-sum taxation system was not integrated into federal tax legislation. In October 1949, the Federal Government gave in to this pressure: it reformed the national tax system along these lines by using its full powers, a decision validated by the Federal Parliament two months later.48 In September 1950, the Head of the Finance Department of the canton 45 On the aspects summarised in this and the following paragraph, see the file on the

“Concordat entre les cantons de la Confédération suisse sur l’interdiction des arrangements fiscaux”, VCA, S172/816, file n° 14. 46 The text of the “Concordat entre les cantons de la Confédération suisse sur l’interdiction des arrangements fiscaux du 10 décembre 1948” is reproduced in: BGC, 9 November 1959, pp. 40–43. 47 See the intervention of the Head of the Federal Department of Finance in: Bulletin officiel de l’Assemblée fédérale (BO), Conseil des Etats, 9 December 1949, vol. 6, winter session, pp. 542–543. 48 Recueil des Lois fédérales, 1949, No. 39, Federal Government Decree of 11 October 1949, pp. 1532–1533. See also the related Ordinance of the Federal Department of Finance and Customs of 12 October 1949, published in: Idem, pp. 1534–1536. The Federal Government’s decree was retrospectively approved by the Federal Parliament in

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of Vaud congratulated himself on his success about the taxation of wealthy foreign residents by ‘getting our point of view accepted at the federal level as it had been at the intercantonal level’.49 The canton of Vaud even managed to apply a flat-rate tax below the minimum that it had itself made the other cantons and the Confederation accept. Based on the deliberately ambiguous wording of its 1947 law described above, it applied the proposed 50% deduction, including on Swiss securities, to foreigners staying in hotels. And, of course, the canton of Vaud only joined the Concordat at the expiry of the deadline, in November 1959.50

Conclusion On the whole, this contribution confirms that the luxury tourism industry, closely linked to banking circles, was the linchpin of the tax exemption provisions for wealthy foreigners residing in the canton of Vaud who were not gainfully employed there. During the period from the introduction of the cantonal tax on movable assets and income in 1862 until the end of the First World War, this category of foreigners was, in fact, totally exempt from taxation. For some sixty years, the circles in question succeeded in maintaining this tax regime, which defied all competition, despite growing opposition from farmers and employees, who were confronted with an increasing tax burden. The luxury tourism industry succeeded in making its interests a ‘raison d’Etat’, so much so that in the face of strong opposition to the special tax regime from most of the population, who did not want to be left to cover the costs of the First World War alone, the Cantonal Government used its full powers twice, in 1916 and 1918, to maintain an extraordinarily favourable tax regime for wealthy foreigners. Indeed, lump-sum taxation replaced the total exemption with a very modest tax and was levied only on presumed resources, i.e. on a small or even tiny fraction of the actual income and without the need to file a tax return. The tax was so light that

December 1949. See BO, 9 December 1949, vol. 6, winter session, Conseil des Etats, pp. 540–543 and Idem, 21 December 1949, Conseil national, pp. 920–924. 49 BGC, 5 September 1950, p. 1589. 50 BGC, 9 November 1959, pp. 34–45 and 16 November 1959, p. 179.

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its proceeds represented, on average, only 1.1% of the canton’s direct tax revenues between 1920 and 1960. After World War II, the ‘forfait fiscal’ went from being a ‘raison d’Etat’ for the Canton of Vaud to a ‘raison d’Etat’ for the Federal Government. In 1949, the latter used its full powers to maintain and anchor this system in federal taxation. We have seen the critical role played by the canton of Vaud in this federal reform, and its connection to the Vaud tax reform of 1947. The concession granted to maintain and entrench the lump-sum taxation system in Switzerland was ultimately very limited, since it only concerned the minority of foreign residents holding Swiss securities. It should be noted that this episode highlighted the competition-alliance relations between cantons within the Swiss tax haven. On the one hand, the cantons of Vaud and Geneva played a leading role in the conclusion of alliances aimed at maintaining and even reinforcing, in terms of federal taxes, the lump-sum tax system. On the other hand, and simultaneously, a fierce competition continued to structure relations between cantons in terms of cantonal taxation. As we have seen, the Vaud authorities did not hesitate to violate the principles that they had forced the other cantons to accept by offering a 50% discount to foreigners staying in hotels. This additional rebate confirmed that the role of the Vaud tax package was to fill the coffers of the tourist and banking sectors, not the public coffers.

Bibliography Ardant, Gabriel. 1971. Histoire de l’impôt. Paris: Fayard. Arlettaz, Gérald. 1980. Libéralisme et société dans le canton de Vaud: 1814–1845. Lausanne: Bibliothèque historique vaudoise. Correvon, Roger. 1910. Etude sur l’impôt mobilier dans le canton de Vaud. La loi du 21 août 1886 et la jurisprudence de la Commission centrale. Lausanne: Payot. de Cérenville, Max. 1898. Les impôts en Suisse. Leur assiette et leur quotité. Lausanne: Corbaz. Delalande, Nicolas. 2011. Les batailles de l’impôt. Consentement et résistances de 1789 à nos jours. Paris: Seuil. Farquet, Christophe. 2018. Histoire du paradis fiscal suisse. Paris: Presses de Sciences Po. Favre, Edouard. 1917–1919. L’internement des prisonniers de guerre, malades ou blessés. 3 vols. Bern: Bureau du service de l’internement. Gubler, Edouard. 1949. Pauschalierung der eidg. Wehrsteuer. Steuer Revue 4: 96–100.

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Guex, Sébastien. 2022. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review 96: 353–372. https://doi.org/10.1017/S00076805 20000914. Honegger, Fritz. 1942. Vergleichende Betrachtungen über das Erhebungsverfahren bei den direkten Bundessteuern. Ein Beitrag zur schweizerischen Steuerpolitik. Zurich: AG. Fachschriften-Verlag & Buchdruckerei. Humair, Cédric, Marc Gigase, Julie Lapointe Guigoz, and Stefano Sulmoni. 2014. Système touristique et culture technique dans l’Arc lémanique. Analyse d’une success story et de ses effets sur l’économie régionale (1852–1914). Neuchâtel: Alphil. Jogarajan, Sunita. 2012. The Conclusion and Termination of the “First” Double Taxation Treaty. British Tax Review 3: 283–306. Longchamp, Olivier. 2001. L’introduction de l’impôt mobilier dans le canton de Vaud, 1860–1863. Lausanne [Unpublished Master’s Thesis]. Lorusso, Rosanna. 1989. Note sur la construction d’une série pour le revenu cantonal vaudois de 1886 à 1987 . Lausanne: Ecole des H.E.C. Ludwig, Carl. 1957. La politique pratiquée par la Suisse à l’égard des réfugiés au cours des années 1933 à 1955. Rapport adressé au Conseil fédéral à l’intention des conseils législatifs. Bern: Chancellerie fédérale. Meynaud, Jean (ed.). 1963. Etudes politiques vaudoises. Lausanne: Meynaud. Schmid, Karl Emanuel. 1940. Zum Problem der allgemeinen Einkommensteuer in der Schweiz. Zurich: Müller, Werder & Co. Schmidt, Ernst. 1959. Das interkantonale Konkordat über den Ausschluss von Steuerabkommen. Basel: Helbing & Lichtenhahn. Tschumper, Rudolf. 1953. Zur Frage der Pauschalierung im schweizerischen Steuerrecht. Zurich: Juris-Verlag. van Orsouw, Michael. 1995. Das vermeintliche Paradies: eine historische Analyse der Anziehungskraft der Zuger Steuergesetze. Zurich: Chronos. Verrey, Pierre. 1948. L’impôt global pour la défense nationale dû par les étrangers. Conditions d’assujettissement. Revue de droit administratif et de droit fiscal 4: 165–177. von Schanz, Georg. 1890. Die Steuern der Schweiz in ihrer Entwicklung seit Beginn des 19. Jahrhunderts. 5 vols. Stuttgart: Cotta. Vuy, Jules. 1838. Essai sur la Taxe des gardes. Geneva: E. Pelletier.

CHAPTER 4

Emergence of, and Threats to, the Belgian Tax Haven During La Belle Epoque, 1890–1914 Simon Watteyne

How and when did the Belgian tax haven emerge? During La Belle Époque, financial income from investments (dividends, interests, capital gains, mortgages, loans, etc.) was nearly not taxed in the country, in contrast with other European nations, which were successively introducing progressive income taxes with new control mechanisms. This fiscal conservatism that characterised Belgium made it attractive to the holders of foreign fortunes. In the early 1910s, however, the prospect of reforming the old direct taxes in the context of increased military spending seriously threatened the increasingly popular Belgian tax haven. In the scant existing historiography, the development of Belgian taxation is still presented in a similar way to those of the modern states of

S. Watteyne (B) Université Libre de Bruxelles, Brussels, Belgium e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_4

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the nineteenth and twentieth centuries, like France, while taking into account the political specificities of Belgium (Van de Perre 2003; Hardewyn 2003). The idea that the Belgian tax system was sometimes closer to tax havens like Switzerland during its history is completely new, especially regarding the period before the First World War. Before 1914, Belgium is essentially known in the historiography for its diplomatic neutrality, which seems to have almost completely deprived historians specialising in Belgian foreign policies of another subject than the colonisation of the Congo (Stengers 1981). This chapter also provides a novel historical approach to the rather dated study of the increased militarisation of Belgium in the early 1910s, focusing on its financial and fiscal, rather than geopolitical, issues (Devleeshouwer 1958; Duchesne 1961; Willequet 1963; Lademacher 1971; Haag 1990). Thus, this chapter aims to analyse the political struggles in Belgium at the beginning of the twentieth century in terms of both the tax issue and the protection of banking secrecy among Conservatives and Christian Democrats within the Catholic government and their parliamentary majority, which were under strong pressure from the electoral rise of the Workers’ Party and the Socialists’ campaign for the creation of the first progressive taxes on the global income of the bourgeoisie.

‘A Convenient and Safe Haven’ In 1903, Belgium’s trade had increased by 52% over the previous fifteen years, while general world trade had increased by only 8% (Smeesters 1903, 97–98). With 6.6 million inhabitants, Belgian financial strength was proportionally surpassing that of England.1 And despite some attempts by the first Socialist deputies to legislate after 1894 for a progressive tax on total income, the Conservative Catholic governments, which had been in power continuously since 1884, rejected any attempt at tax reform. Since the creation of the country in 1830, only the Liberals had risked a tax reform in 1883; they lost the 1884 elections and never returned to power, punished by the bourgeois electorate for the rule of census suffrage (from 1830 until 1893, only 2% of the population was paying enough direct contributions to be considered a voter). In 1905, customs and excise taxes were the most important tax source—accounting for 50.5%

1 Moniteur des intérêts matériels, 1900, 1113.

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of total taxes.2 Taking into account national income, the tax burden was marginal—4.62% in 1900 (Clement 1995, 83). In contrast to other European nations that introduced progressive income taxes in the 1890s and 1900s (Scheve and Stasavage 2016, 77), such as France, England, the Netherlands, and several regions in Germany, which introduced capital income taxes even before the 1890s (De la Vallée Poussin 1895, 453), taxation of capital income remained almost non-existent in Belgium, while progressive rates were never seriously discussed in Parliament, even though the movable wealth in Belgium rose from seven billion Belgian francs (BF) in 1898 to 11.7 billion in 1907 and climbed to 14 billion in 1913.3 Moreover, banking secrecy and the absence of tax control mechanisms made fraud easy: Belgian companies were largely evading the 1.6% droit de patente due on the distribution of bond interests and share dividends, declarations to the succession tax were largely distorted when it was targeting capital, and the various index bases of the personal contribution (such as the number of doors, windows, servants, and horses) were rarely reaching real income levels. Moreover, movable property owned by foreigners, in any form, was completely exempt from any tax when deposited and managed by Belgian banks. These pre-war characteristics turned the country into a tax haven, especially for French fortunes. Indeed, the evolution of the French tax system encouraged capital flight. In addition to the coupon tax of 4%, stamp duty on securities of 1.2% and the tax on the transfer of securities of 0.75%,4 France introduced progressive inheritance taxes in 1901. The top marginal rate of 2.5% remained very low, but the opposition to progressive rates and the feeling of a largely excessive tax burden were such that the scale of inheritance tax evasion increased significantly as soon as the 1901 law was passed (Piketty 2001, 245). Then, between 1907 and 1914, France was shaken by the fierce debates on the adoption of a progressive tax on global income (Delalande 2014, 217). This led to an exodus of capital abroad, mainly to Switzerland (Farquet 2016, 51; Guex 2021, 12–17) and Belgium, where 2 Budget 1905, House of Representatives (HR), n°4/I. 3 This is the total movable wealth in Belgium, not just the wealth hidden from taxation.

Moniteur des intérêts matériels, 15 January 1899; ibid., 20 January 1907; ibid., 26–28 December 1913. 4 Tax on French assets, undated, State Archives of Belgium (SAB), Mons, Michel Levie, n°76.

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expatriate capital was kept absolutely confidential, with Belgian banks like the Société Générale, the biggest one, openly lobbying rich French people to deposit their financial titles in Brussels (Becqué 1912, 245). Between 1903 and 1911, the National Bank’s gold reserves more than doubled, confirming the massive influx of capital—this was the principle of the gold standard system.5 In July 1907, however, the French Finance Minister Joseph Caillaux hoped to sign a convention with Belgium on measures against tax evasion, declaring in the French Parliament that ‘individuals who thought they were going to take their securities to Switzerland or Belgium with a light heart must expect a little surprise soon’.6 He relied on a convention signed between Belgium and France in 1843 that would allow an exchange of information between the two countries.7 While the conservative Belgian press felt that Caillaux might be disappointed that he could not stop the exodus of French capital,8 the liberal press warned its French readers that the investment of capital in Belgium could be exposed to ‘all the brutal controls that their owners wanted to avoid’ because of an old treaty.9 In a Catholic newspaper, a director of a financial institution with French clients stated that while the French tax authorities had no means of controlling French fortunes in Belgium, which was reputed to be unaware of the wealth of its own citizens and of foreigners, there would be a danger if Belgian authorities agreed to respect the bilateral convention to facilitate the collection of taxes on emigrated capital, which could amount to 800 million BF in Switzerland alone in 1906—the director estimated that the emigration of French capital to Belgium was intense but probably less than this amount.10 It is estimated that a minimum of two or three billion BF from Belgium, and perhaps twice as much French capital, emigrated to Switzerland between 1901 and 1914 (Guex 2021, 14). According to some evaluations at the time, about two billion BF of the French capital was withdrawn from Belgian private banks in 1906 and at least 1.5 billion in 1907, but this figure was vastly exaggerated. A more 5 Report 1911, National Bank of Belgium (NBB), Brussels, annex D. 6 Bill establishing a tax on global income: report, 13 August 1919, HR, n°320, 43. 7 Le Vingtième Siècle, 22 July 1907. 8 Ibid., 24 July 1907. 9 L’Indépendance belge, 22 July 1907. 10 Le Patriote, 24 July 1907.

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serious evaluation would estimate the total amount of French capital that escaped to Belgium at one or two billion BF between 1901 and 1914 (Bitsch 1994, 165). Caillaux’s statements and their echo in the Belgian press caused great excitement among the French clients of banks in Belgium, reported Catholic deputy Remy Le Paige in Parliament on 26 July. Le Paige then asked the Finance Minister Julien Liebaert about the revelation of the 1843 convention by Caillaux: ‘I would like to ask the Minister to tell me whether, today, at the request of a French tax agent, Belgian officials can carry out research to establish the existence of money deposits made by a Frenchman in Belgium’.11 Gold reserves at the National Bank did indeed decrease from 289 to 274 million BF between 11 and 23 July, which could indicate a capital flight effectively caused by Caillaux’s pressure, but gold reserves also decreased on other occasions in 1907, probably caused by the increase in the interest rates of the British, German, and French central banks.12 The impact of Caillaux’s initiative is therefore difficult to assess. Finance Minister only since May 1907, Julien Liebaert was a fervent Conservative. While acknowledging the existence of the convention, he killed Caillaux’s initiative in its tracks, declaring that financial institutions that received sums of money or securities from Belgians or foreigners were not obliged to declare them to the administration, which had no right of investigation. ‘These are the principles when it comes to a local inhabitant and the tax due to the Belgian Treasury; the same naturally applies when it comes to a foreigner and the tax due to a foreign State’.13 ‘M. Caillaux knows how to make all the frightened capital flee from France by express train, by automobile, by balloon’, now that the French were advised of ‘a convenient and safe haven [in Belgium]’ thanks to the words of Liebaert, exulted a conservative newspaper.14 From July 23 onwards, the gold reserves at the National Bank increased again.15 Three years later, in 1910, Liebaert was pleased that his budgets were balanced and

11 Parliamentary Records (PR), 26 July 1907, 1766. 12 Report 1907, NBB, annex D. 13 PR, 26 July 1907, 1766–1768. 14 Le Vingtième Siècle, 28 July 1907. 15 Report 1907, NBB, annex D.

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that no tax laws had to be passed, unlike in other European countries.16 Belgium was remaining a tax haven for national and foreign capital, which was officially acknowledged by Belgian Conservatives in power.

New Military Expenses and the French Initiative On the geopolitical level, tensions between the great European powers continued to increase, making the military question a top concern for Belgium as early as November 1908, when it became clear that Belgium’s military effort was insufficient, and the country could be used as a crossing path if not a battlefield for the French and German armies (Dumoulin 2006, 63–64). A current within the ruling circles and the military leadership, supported by King Leopold II, began to push for the establishment of a powerful army, the conclusion of military alliances, and the search for strategic borders such as the Rhine and the Scheldt, despite the opposition of radical Liberals and Socialists (Witte 1987, 143). Some Catholics, led by Charles Woeste, were also opposed to any military reform project from 1870, claiming that Belgium had escaped the FrancoGerman war more because of the will of the great powers to respect Belgian neutrality than because of the will of its army. According to Woeste, the electorate was more concerned with escaping high taxes than with bearing the consequences of an expensive military policy (Woeste 1927, 349). However, the hawks within the military and political elites achieved an important victory when the drawing of names was replaced by personal military service at the rate of one son per family in December 1909. And despite the death of Leopold II three days after the adoption of the new military law, a loss of an important ally for the military falcons, the Agadir crisis between France and Germany in 1911, accelerated the war psychosis in Belgium (Devleeshouwer 1958, 143). In the meantime, the government led by François Schollaert fell on 7 June 1911 because of the ‘school war’ between Catholics and anticlericals. Count Charles de Broqueville, a prominent member of the Catholic Party, then replaced Schollaert as head of the government (the title of Prime minister was only used after 1918) to ensure an effective transition until the 1912 elections. As Finance Minister, Liebaert was 16 Budget 1910, HR, n°4, 7; Letter from Liebaert, November 1910, SAB, Brussels, de Broqueville, n°143.

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replaced by the Christian Democrat Michel Levie, a former lawyer from Charleroi devoted to social causes. The election campaign of 1912 is known as one of the most virulent in Belgian history. Everyone believed that the Socialists, allied with the Liberals, were on the verge of a great electoral victory. Taxation was one of the major issues, along with universal suffrage, the military law, and the abandoned school law. Catholic propaganda asserted that the country had a brilliant economic and fiscal situation that attracted wealth from abroad, whereas with the ‘Liberal-Socialist cartel’ it would be discord and ruin.17 Levie himself promised that he would refrain from creating new taxes, regardless of what his Liberal and Socialist opponents said.18 The ‘red peril’ was deeply feared by the ruling bourgeoisie (Keunings 1994, 329). On the side of the Liberal and Socialist opposition, the Catholics were accused, on the contrary, of plundering the public finances for the benefit of convents and Catholic schools.19 To everyone’s surprise, the Catholics emerged victorious, with a slight absolute majority. Without the plural vote, the victory would probably have been Socialist. The electoral system was indeed still close to the census suffrage abolished in 1893: until 1919, the universal male suffrage included one or two additional votes for rich people who paid a certain amount of direct contributions. De Broqueville started to focus his attention on a new military law, even if as early as June 1912, Levie informed him that despite electoral promises, new taxes might be necessary.20 In November 1912, the British and the French urged the Belgian government to develop its army. De Broqueville was determined to take action. Personal and universal military service finally came into force in June 1913. However, a major obstacle to the implementation of the new military law and the increase of soldiers remained: its high cost. The additional annual expenses were estimated at 47 million BF in the first year (state expenditure amounted to 703.5 million in 191221 ), reaching a total of 284 million BF in 1918.22 Levie

17 Catholic record, 1912, SAB, Levie, n°94. 18 Le Pays Wallon, 27 February 1912. 19 Le Peuple, 31 May 1912; La Meuse, 1 May 1912. 20 Letter from Levie, 24 June 1912, SAB, de Broqueville, n°140. 21 Budget 1912, HR, n°4, 1. 22 Bill to create financial resources for new military expenditure, 11 June 1913, HR, n°290, 2.

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was concerned about the expenses because taxes had to be increased.23 At the beginning of March, he considered that it was still premature to announce new taxes until the military charges had been clarified.24 Knowing that Belgium would have to increase its taxes, the French government started to pressure Levie in May 1913. While the baron and diplomat Gustave Guillaume tried to negotiate a loan from France to cover Treasury Bonds, a usual process given the enthusiasm of the French for Belgian bonds (Bitsch 1994, 168–170), he informed the Minister of Foreign Affairs, Julien Davignon, on May 19 that his approach was a success, but that in exchange the Finance Minister Charles Dumont wanted Belgium to change its legislation on succession tax, and also on taxes on securities and stock exchange transactions. According to Baron Guillaume, this was not a ‘bargain’ but Dumont, seeking to discourage French capitalists from depositing their movable assets in Belgium, was hoping that Levie would agree. While the Belgian diplomat was sceptical about these measures ‘in opposition to the entire legislation and national spirit’, the French Minister told him that he was determined to convince Levie by inviting him to Paris.25 The next day, the Baron wrote to Davignon that Dumont belonged ‘to the reddest faction of the Cabinet’26 and, in a second letter, that he wanted to impose a tax on all foreign securities circulating in France. The project was only at the study stage, the Baron wrote, but its consequence would be that French capitalists would have ‘more than ever the advantage of buying foreign funds, as long as they leave them outside their country’s borders’, hence Dumont’s initiative to convince the Belgian government.27 It had been known for some years that French and German capital was being exported to Belgium on a massive scale because of the tax laws adopted in the two large neighbouring countries, with Brussels now becoming an international stock exchange centre where many foreign financial securities were bought and sold.28 On

23 Letter from Levie, 11 February 1913, SAB, de Broqueville, n°140. 24 Letter from Levie, 4 March 1913, SAB, de Broqueville, n°140. 25 Letter from baron Guillaume, 19 May 1913, SAB, Levie, n°71. 26 Letter from baron Guillaume, 20 May 1913, SAB, Levie, n°71. 27 Second letter from baron Guillaume, 20 May 1913, SAB, Levie, n°71. 28 The Finance Minister and public loans, 1913, Catholic University of Louvain-la-

Neuve (UCL), Janssen, n°7.

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Saturday, May 21, Levie was received with great ceremony by his French colleague29 and then left for Brussels, very satisfied with the trip and promising Dumont the same welcome in Belgium the day he came in return.30 Levie was convinced by Dumont (Bitsch 1994, 171) and it was no great difficulty to implement this, especially since Levie had already been thinking about the principle of a tax on securities since January 1913, which had caused a certain amount of fear in the banking sector, alerted that such a project ‘would cause [Belgian] banks to lose the management of the French capital’, escaping France’s tax policies.31

Levie’s Taxes By the end of May, the detailed military expenditure programme was known; the green light was given to present the government’s taxes.32 Levie proposed a tax increase through five bills for a total amount of 40 million BF (a bit less than the proposed expenditure because he expected a ‘spontaneous progression’ of the tax yield in the years to come), submitted to Parliament on June 1133 : an increase in excise duties on alcohol in order to bring in three to five million BF,34 a new tax on automobiles—which were until then not included in the index bases of the personal contribution—to raise two to two-and-a-half million BF,35 a new tax on each cinema screening, yielding 250,000 to 500,000 BF,36 amendments to the laws on registration and inheritance tax, raising 12 to 16 million BF,37 and a transformation of the 1.6% droit de patente and its additional tax (around 2.4% in total, with exemptions) on dividends and interest of Belgian companies, last amended in 1849, into a separate

29 Telegram n°36, 20 May 1913, SAB, Levie, n°71. 30 Letter from Levie, 21 May 1913, SAB, Levie, n°71. 31 Tax on securities, 28 January 1913, UCL, Janssen, n°8. 32 Letter from Levie, 31 May 1913, SAB, de Broqueville, n°140. 33 Bill to create financial resources for new military expenditure, 11 June 1913, HR, n°290, 5. 34 Bill to increase alcohol duty, 11 June 1913, HR, n°295. 35 Bill establishing a car tax, 11 June 1913, HR, n°292. 36 Bill establishing a cinema tax, 11 June 1913, HR, n°293. 37 Bill to amend the laws on registration duties, 11 June 1913, HR, n°294.

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4% tax on the profits of Belgian and foreign companies, yielding eight to nine million BF.38 The last two bills were added by Levie for two reasons: French diplomatic pressure and the need to appeal to the left wing of the Catholic Party, to which Levie and de Broqueville were close, by avoiding consumption taxes ‘in the name of a sense of justice for the working class’.39 Indeed, it included several measures targeting financial incomes with, in the first instance, the empowerment of the tax authorities to prevent widespread tax evasion in the registration of private leases of real estate, which were previously rarely registered, although a 0.2% duty was supposed to apply; the creation of a proportional registration duty of 0.2‰ on all stock market transactions, obliging stock market agents to communicate their registers to the administration; the creation of a stamp duty of 2% on foreign shares or bonds (which was, however, lower than in France, Germany, and Italy); a set of measures aimed at better controlling the declaration of movable capital for the largely fraud-affected succession tax, for example through the solemn affirmation of the sincerity of the declaration, the doubling of the fines incurred for false declaration, the inventory of securities to be provided to the tax authorities, and the declaration of donations made three years before death.40 The second bill was about a more significant taxation of dividends and interests by targeting Belgian and foreign companies with a rate of 4%—as in France—instead of 2.4% (and of 2% for profits made abroad instead of 1.2%). Out of nearly 5000 stock companies established in Belgium, including 300 foreign ones, 42% were created between 1904 and 1914. Given that the annual profits of these companies established in Belgium (and of certain industrial and financial professions) exceeded 600 million BF per year (of which one-third was realised abroad), the return expected by the administration was relatively minimal and would be far from causing the death of the industry and driving away foreign capital, according to Levie.41 This reform of the droit de patente had been under study for some years by Charles Clavier, an erudite director of the Direct 38 Bill establishing a profit tax, 11 June 1913, HR, n°291. 39 PR, 6 August 1913, 2103. 40 Bill to amend the laws on registration duties, 11 June 1913, HR, n°294, 1–20. 41 Bill establishing a profit tax, 11 June 1913, HR, n°291, 1–4. Details of the evalu-

ations can be found here: Bill to create financial resources for new military expenditure, 11 June 1913, HR, n°290, 6–7.

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Contributions Department, with progressive ideas close to the Socialists, who spent his career in Belgium and in the League of Nations after the War, thinking about theoretical and technical ways to improve the tax system and make it fairer; he started working on reforming the patente in August 1909.42 While socialist and liberal newspapers were angry about the tax increases of the Catholic government for military purposes,43 bankers and industrialists were also furious. The new tax measures would cause Belgian banks to lose the management of French capital and would ultimately be ineffective should Belgian companies emigrate abroad.44 They therefore made a collective approach to the government. Levie’s first thought was to resign, but he was convinced to stay by his colleagues (Haag 1990, 136). He then agreed to reduce by half the tax rate on interests, with the help of a commission appointed by bankers.45 Conservatives inside the Catholic Party were also annoyed about the proposed measures. Dictating the tone in the Central Section of the Finance Commission of the House, three Conservatives, Charles Woeste, Julien Liebaert, and Paul Wauwermans, strongly opposed the principle of a tax on profits.46 They even succeeded in proposing amendments to the bill on registration and succession tax: the rate of 0.2‰ for the tax on stock exchange transactions was reduced to 0.15‰ (it was then 0.24‰ in England, 0.3‰ in Germany, 0.75% in France), so bankers would not have to communicate their registers to the administration out of respect for ‘the secrecy of stock exchange transactions’. The tax would be collected by affixing a stamp on the client’s slip that would not have to specify the details of the transactions, while the stamp on foreign securities, considered a threat to the foreign capital ‘sleeping’ in Belgian banks and estimated at more than 2 billion BF at the time, was abolished when required for mere possession in a Belgian bank and reduced from 2 to 1% should their negotiations take place in Belgium. Finally, the Central

42 Note from Clavier, 13 August 1909, SAB, Levie, n°67. 43 Le Peuple, 12 June 1913. L’Indépendance Belge, 14 June 1913. Gazette de Charleroi,

13 June 1913. 44 Belgian Maritime League, undated, SAB, de Broqueville, n°140. 45 Amendments, 21 June 1913, SAB, Schollaert and Helleputte, n°254. 46 Bill establishing a profit tax: report, 1st August 1913, HR, n°350, 14.

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Section removed the control measures for movable capital on the declaration of the succession tax. In the eyes of the Conservatives, there was a great risk that capital would flee the country if it felt threatened, as was the case in France.47 The cabinet was therefore facing not only Socialist and Liberal opposition but also more dangerous opposition to government stability from the Catholic Right.

The Excellence of Levie’s Speech Parliamentary debates began on 6 August 1913. The Liberal opposition was furious because the tax bills had caused ‘the most serious alarm’ in the business world. Louis Franck, a businessman who excelled in financial debates, fiercely denounced Levie’s measures, which would affect the financial markets: ‘In recent years, our major commercial centres, which twenty years ago were of only secondary importance in financial matters, have taken on a role of the first importance. They owe this, no doubt, to the initiative and energy of our capitalists, traders, and industrialists; but they also owe it to two particular factors: the assistance of foreign capital and the great fiscal freedom which has so far favoured the organisation and operation of limited companies in our country. (...) With Switzerland, gentlemen, which in this respect is in the same situation as we are, Belgium has become like an oasis in the midst of the invasive and often aggressive taxation of the large neighbouring countries. (...) How do the new taxes threaten this situation?’48

The Liberal Edouard Pecher stated that the French capital was crossing the border into Belgium, with French banks setting up in Brussels and Antwerp, such as Crédit Lyonnais, Comptoir National d’Escompte and Société Française Générale. The Belgian banks, for their part, had billions of foreign deposits, particularly French deposits. For Pecher, this flow of foreign capital was the source of Belgian prosperity.49

47 Bill to amend the laws on registration duties: report, 30 July 1913, HR, n°342, 1–79. 48 PR, 7 August 1913, 2126. 49 Ibid., 19 August 1913, 2323–2326.

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The Socialists were also angry, but not for the same reasons. Firstly, they would not vote for the new taxes because it was to pay for the military madness of the Catholics. Secondly, they would nevertheless be ready to vote for a progressive tax on Belgian fortunes and high incomes, like the reforms in Germany, France, and Luxembourg sought to achieve. Indeed, they were disappointed that the Finance Minister did not seize the opportunity to reform the tax system in depth. The reason was clear according to the Socialists: Catholics only cared about their bourgeois electorate.50 Faced with the inevitable refusal of the opposition, Levie had only one option. He had to convince the Conservatives. His speech on August 8 lasted more than three hours (De Saint Moulin 1967, 582). A good speaker, he challenged the Liberals who rejected his tax bills without offering anything in return and argued against the Socialists and their idea of a progressive income tax without any preparation of public opinion in order to gain a quick tax yield.51 As for the criticism from the Conservatives in the Finance Commission, Levie accepted many of their amendments, such as the abolition of the stamp duty on ownership of foreign securities and its reduction to 1% on negotiations in Belgium, the control measures for the registration of leases, and, above all, the ‘inventory of safes’—the list of securities—that the tax authorities wished to obtain in order to control the financial fortunes declared for succession tax: ‘There was a lot of concern about this innovation; it was said that foreign capital was going to feel threatened and flee our country. (…) I did not want to insist and bowed to the decision of the Central Section’. However, he remained committed to certain measures to repress frauds, such as the truthful declaration of financial wealth, equivalent to an oath, in regard to the succession tax.52 ‘Movable capital is there, and it is growing all the time. The law on succession tax requires it to pay its share, and that is justice. (...) Vexatious and inquisitorial means, they cry out! (...) When it comes to excise duty, what investigations and harassments are industrialists not subjected to? (...) Take customs duties. You go from one country to another: baggage inspection, body inspection. (...) Real estate and its movements are subject to constant 50 Ibid., 7 August 1913, 2134–2138. 51 Ibid., 8 August 1913, 2166–2167. 52 Ibid., 2174–2175.

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surveillance and absolute publicity. The secrecy of land ownership does not exist. (...) But when it comes to movable capital, everything is sacred; the taxman cannot know anything about it; it is proclaimed that any means of ascertaining its existence is vexatious, harassing, inquisitorial! Well, that must no longer be the case. (Very good! on many benches)’.53

Levie received sustained applause from all benches at the end of his speech, even from the Socialists.54 The Catholic press underlined the quality of Levie’s brilliant speech, applauded by all parties.55 Liberal newspapers supported the talent of the Finance Minister but denounced nevertheless his supposed ‘hatred of money’,56 also believing that the Socialists only applauded Levie’s speech because they feared that if he fell, he would be replaced by a Conservative.57 Indeed, despite the excellence of Levie’s speech, the Conservative faction surrounding Charles Woeste was determined to defend all the amendments of the Central Section. While a socialist newspaper headlined ‘Mr Levie against Mr Woeste’ in its edition of 9 August,58 another newspaper wrote that ‘the great man of the Right will have his revenge’, since Levie ‘knows perfectly well that he cannot count on any vote from the Left. (…) The Finance Minister will therefore die in style; he will be choked with flowers’.59

The Four Tax Rules of Charles Woeste Speaking on behalf of the Right on August 12, Woeste emphasised that thanks to his speech, Levie had been able to find common ground among the majority. It was true that Woeste had not wanted to hear about new taxes until a few months previously. After all, the Catholics had been in power for twenty-nine years and had never introduced any new taxes. But the geopolitical context had darkened and military reform was

53 Ibid., 2176. 54 Ibid., 2179. 55 Le Bien Public, 10 August 1913. Le Patriote, 10 August 1913. 56 L’Étoile Belge, 11 August 1913. 57 Le Soir, 11 August 1913. 58 Le Peuple, 9 August 1913. 59 L’Express, 9 August 1913.

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now necessary. New tax revenues needed to be voted in. He immediately announced his conditions for the support of the Conservatives, protectors of Belgium’s financial attractiveness: all the amendments of the Central Section had to be passed in order to prevent Belgian capital from emigrating, and to keep and attract foreign capital in the interests of the country’s commercial and industrial prosperity. If the Socialists were to come to power, Woeste feared that the tax system would endure ‘a kind of general turmoil that would leave no category of citizens in peace’.60 That was why he proposed amendments based on four specific and metaphorical rules. The first was that people should not be ‘skinned’. The second was to avoid ‘petty vexations’ in the area of taxation. The third was that people with ‘a scrupulous conscience’ should not be put in a position of inferiority vis-à-vis those whose ‘conscience is a little broader’; in other words, ‘no tax inquisition!’ The fourth, and most important, was that it was necessary to both prevent Belgian capital from emigrating and to seek to retain and attract foreign capital.61 The Antwerp bankers were also convinced that the taxation of foreign capital placed in Belgium ‘would have a disastrous influence’ on the economy, while the trade in foreign stocks and shares would henceforth be established in Switzerland: ‘Indeed, the investments are made by people who have learned to appreciate the advantages of the absence of fiscal measures’. On August 18, before the vote in Parliament, they invited Levie to reduce taxation on foreign securities as much as possible.62 The vote was carried out from 19 to 22 August. The first three tax bills were easily adopted by the Catholic majority. Complications arose in the technical discussions on the profit tax of limited companies. The Liberal Pecher submitted a motion to abolish it on foreign companies. Debates on the articles of law dragged on for two days. Finally, the profits tax on foreign companies was reduced to 1%—it remained at 4% for Belgian companies. Levie himself asked for the removal of the article forcing any person or company to submit to the administration a list detailing the number of securities owned, as this article had ‘caused a certain amount of emotion in the financial world’. Instead, the tax would be withheld

60 PR, 12 August 1913, 2217–2220. 61 PR, 13 August 1913, 2244–2245. 62 Antwerp banks, 18 August 1913, SAB, Levie, n°77.

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through the application of a stamp on bond and share coupons in financial institutions when a holder of securities came to withdraw his or her income: the administration would therefore have no contact with the taxpayer, and banking secrecy would be fully protected. The project was adopted, with 85 yes votes to 67 no and three abstentions: the entire opposition voted against.63 During the discussions on the last bill, the amendments of the Central Section were all passed, meeting the objections of the Conservatives to protect the fortunes placed in Belgian banks as much as possible. The right-wing, satisfied, voted together with the Christian Democrats, who won by 85 yes votes against 63 no and two abstentions.64 On paper, it was a political victory for Levie, but he had to concede a significant weakening of his measures targeting income from movable capital. Banking secrecy remained fully protected from tax investigations. On the eve of the First World War, which would turn the entire Belgian tax system upside down, the Conservatives and the banking sector managed to protect the movable fortunes placed in Belgium. While the average French person paid the equivalent of 140 BF in taxes in 1912, the Belgian paid only 46 BF, barely a third.65 In the week of the vote, the National Bank’s gold reserves fell by 10 million, reflecting a slight withdrawal of capital. However, the level increased again in the first week of September.66

Conclusion Although the situation started to deteriorate slightly on the eve of the First World War, there is no doubt that during the previous decades, Belgium became a tax haven—one of the oldest, together with Switzerland, with both countries competing in the then booming international tax evasion market.67 in this regard, I rely on the definition of a tax haven 63 PR, 22 August 1913, 2465. 64 Ibid., 2471. 65 Tax burden, 1912, SAB, Levie, n°67. 66 Report 1913, NBB, annex D. 67 While Guex shows how Switzerland gradually became the first tax haven throughout the nineteenth century (Guex 2021), there is also evidence that Belgian rulers were happy to maintain a lower tax burden than their French, British and Dutch neighbours in the early years of the kingdom, in the 1830s (Watteyne 2021).

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given by Palan, Murphy, and Chavagneux, and also chosen by Guex, who define tax havens as ‘jurisdictions that deliberately create legislation to ease transactions undertaken by people who are not resident in their domains, with the view to avoiding taxation and/or regulations, which they facilitate by providing a legally backed veil of secrecy’ (Palan et al. 2010, 236; Guex 2021, 17). Three major conclusions can be learned from the events described in this contribution. Firstly, all the Belgian political and financial actors understood perfectly well the advantages offered to financial incomes by the tax situation in comparison to other countries. If Socialists and Christian Democrats were denouncing with various degrees the injustice of such an unequal tax burden between the working class and Belgian or foreign capitalists, Liberals and Catholic Conservatives were defending those advantages for moral and economic reasons: private property had to be defended from the State and the attraction of foreign capital in Belgium was a major source of its financial, commercial, and industrial prosperity.68 Secondly, the electoral system—the universal male suffrage with plural votes—was blocking any serious political attempt to introduce progressive income taxes in Belgium, as was the case in other countries at the time. It was not a coincidence that Socialists were advocating at the same time for the introduction of universal suffrage, with a single vote and progressive taxes on the wealthy between 1894 and 1914. Advising Levie in 1913, the director Charles Clavier was already clear that ‘it would be foolish to seek to resolve [the issues of a global tax reform] without a patriotic agreement of all the political parties’.69 Such a political deal became possible with the national union in 1919, after the end of plural voting. Thirdly, Catholics were divided on taxation. Following in the footsteps of the counter-revolution of the Church after 1789, Conservatives were defending an absolute protection of private wealth against any State intervention. On the contrary, the rise of a new political ideology after Pope Leo XIII’s Rerum Novarum in 1891 called upon Catholics—Christian Democrats—to respond to the social problems facing the world, including the unfair tax burden of the working class. Thus, Levie seemed

68 The benefits of foreign funds were then largely invested in Belgian and colonial holdings from the 1880s (Bitsch 1994, 180). 69 Note from Clavier, undated, SAB, Levie, n°67.

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to have been receptive to Dumont’s proposals, while his predecessor, the Conservative Liebaert, was strongly opposed to Caillaux’s initiative. This ideological opposition could have signified the end of the Catholic majority in power in 1913, even if the party had found common ground on the military issue. However, Christian Democrats and Conservatives succeeded in finding a collective agreement. In the twentieth century, such compromises between the two wings of the Catholic party would become a characteristic feature of Belgian tax policy, dominated by Catholics. Finally, could Belgium, the battlefield of Europe for centuries, have continued to follow a similar course to Switzerland if it had not been directly involved in the war and occupied by Germany between 1914 and 1918? Months before the German invasion, Levie and then Aloys Van de Vyvere, his replacement as Finance Minister in February 1914, warned de Broqueville that budget deficits would increase despite the new tax revenues.70 In June 1914, Van de Vyvere estimated that the budget deficit was becoming a ‘vital problem’ for the country. New taxes would be necessary as soon as 1915 or 1916.71 Would Belgian policymakers have decided to introduce a progressive income, tax like all neighbouring countries? This remains a mystery. However, it is likely that Belgium would have continued to follow the path of Switzerland throughout the twentieth century. Even if new taxes would have been necessary, Conservative factions would have continued to fight against any effective verification of financial income and top marginal rates would have remained relatively low. In fact, this is exactly what happened in the 1920s. While in 1919 the government of national unity created three new tax schedules, like those in France, including one on financial income as well as a supertax on global income based on a declaration from the taxpayer, Conservative political leaders and financial elites fought fiercely to return to the pre-war situation when Belgium was a tax haven, preventing any intrusion by the tax administration into the banks in order to effectively check the accuracy of the declarations. During the whole of the twentieth century, Belgium always navigated (and still does) between the need for tax increases to face 70 Letter from Levie, 30 October 1913, SAB, de Broqueville, n°140; Letter to de Broqueville, 15 January 1914, SAB, Levie, n°71; Letter from Van de Vyvere, undated, SAB, de Broqueville, n°209. 71 Letter from Van de Vyvere, 26 June 1914, SAB, de Broqueville, n°209.

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chronic budget deficits—caused especially by the two German occupations—and the desire to remain a tax haven for multinationals and wealthy people, with competitive tax rates and tax loopholes on movable capital.

Bibliography Becqué, Émile. 1912. L’internationalisation des Capitaux. Montpellier. Bitsch, Marie-Thérèse. 1994. La Belgique entre la France et l’Allemagne 1905– 1914. Sorbonne. Clement, Piet. 1995. De Belgische overheidsfinanciën en het ontstaan van een sociale welvaartsstaat 1830–1940: Drie benaderingen. Leuven. Delalande, Nicolas. 2014. Les Batailles de L’impôt : Consentement et Résistances de 1789 à Nos Jours. Seuil. De la Vallée Poussin, Jean. September 1895. Des Impôts Sur Les Valeurs Mobilières en France. Revue Générale: 453–454. De Saint Moulin, Léon. 1967. Michel Levie. National Biography 34: 578–583. Devleeshouwer, Robert. 1958. Les Belges et le Danger de Guerre 1910–1914. Nauwelaerts. Duchesne, Albert. 1961. L’armée et la Politique Militaire Belges de 1871 à 1920. Revue Belge De Philologie Et D’histoire 39–2: 391–430. Dumoulin, Michel. 2006. L’entrée Dans le XXe Siècle 1905–1918. Isn Nouvelle histoire de Belgique 1905–1950, ed. Michel Dumoulin et al., 2: 7–167, Complexe. Guex, Sébastien. 2021. The Emergence of the Swiss Tax Haven 1816–1914. Business History Review 95: 1–20. Farquet, Christophe. 2016. La Défense du Paradis Fiscal Suisse Avant la Seconde Guerre Mondiale. Alphil. Haag, Henri. 1990. Le Comte Charles de Broqueville, Ministre D’ÉTAT, et Les Luttes Pour le Pouvoir 1910–1940. Nauwelaerts 1. Hardewyn, André. 2003. Tussen Sociale Rechtvaardigheid en Economische Efficiëntie: Een Halve Eeuw Fiscaal Beleid in België 1914–1962. Vrije Universiteit Brussel. Keunings, Luc. 1994. Ordre Public et Peur du Rouge au XIXe Siècle: La Police, Les Socialistes et Les Anarchistes à BRUXELLES 1886–1914. Journal of Belgian History: 329–396. Lademacher, Horst. 1971. Die Belgische Neutralität Als Problem der Europäischen Politik 1831–1914. Bonn. Palan, Ronen, Murphy, Richard, and Chavagneux Christian. 2010. Tax havens: How globalization really works. Ithaca. Piketty, Thomas. 2001. Les Hauts Revenus en France au XX e Siècle: Inégalités et Redistributions 1901–1998. Grasset.

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Scheve, Kenneth, and David Stasavage. 2016. Taxing the Rich: A History of Fiscal Fairness in the United States and Europe. Princeton. Smeesters, Constant. January 1903. Notre Avenir Économique. Revue Générale: 95–112. Stengers, Jean. 1981. Opinion Publique et Politique Extérieure: Le Cas de la Belgique. École Française De Rome. 54–1: 29–47. Van de Perre, Stijn. 2003. De Lasten Van de Macht: Fiscaal Beleid in België 1830–1914. Katholieke Universiteit Brussel. Watteyne, Simon. 2021. La Prédominance D’une Fiscalité Libérale en Belgique: Une Histoire Politique 1847–1962. Free University of Brussels. Willequet, Jacques. 1963. La Violation de la Neutralité Belge en 1914: Réflexions Nouvelles. Revue Belge De Philologie Et D’histoire 41–2: 487–499. Witte, Els, and Jan Craeybeckx. 1987. La Belgique Politique de 1830 à Nos Jours: Les Tensions d’une Démocratie Bourgeoise. Labor. Woeste, Charles. 1927. Mémoires Pour Servir à L’histoire Contemporaine de la Belgique 1859–1894. Dewit 1.

CHAPTER 5

The Oil Multinational Shell’s History of Using Tax Evasion Methods, Including Tax Havens and Political Pressure, 1914–1974 Tijn van Beurden

Introduction The tax-avoiding behaviour of multinational corporations (MNCs) has attracted attention in many publications over the years. In these publications, the discussion of the tax behaviour of a particular MNC is usually limited to one—or at most a few—events that usually occur in a relatively short period of time. An example of this is an article by the fiscal expert J. Nijst, in which he mentioned that the American company Standard Oil had a holding company in Liechtenstein in the early 1930s in order to reduce its tax bill (Nijst 1931, 46). In this article, only one tax-avoiding

T. van Beurden (B) Independent Researcher, Haastrecht, The Netherlands e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_5

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event from Standard Oil is mentioned. There are not very many publications in which the tax behaviour of a specific multinational over a longer period is one of the central issues. The articles of M. Spoerer and R. Izawa are among this small group. In his article Go West, Spoerer demonstrates how the multinational C & A succeeded in various methods of reducing its tax bill from the mid-1930s till the beginning of the 1960s (Spoerer 2019). Izawa describes, among other things, how the British multinational Imperial Continental Gas Association avoided taxes by reorganising its corporate structure in the period from 1925 to 1939 (Izawa 2019). In contrast with other studies, this case study focuses exclusively on the tax history of one specific MNC over a longer period: the Royal Dutch Shell Group. I have chosen this MNC as it is and was one of the largest oil companies in the world, with many subsidiaries worldwide. It was therefore in a position to reduce its tax bill by using complicated arrangements. The latest comprehensive study of the group’s history was published in 2007 to mark its centenary (Howarth et al. 2007). That study also covered a number of tax-related issues. It revealed, for instance, how tax concessions on Curaçao were obtained via political influence (Jonker and Van Zanden 2007, 154). The authors of this four-volume publication had access to the group’s archives. This study demonstrates that the tax-avoiding behaviour from this MNC was not incidental, but structural. That probably also applies to all multinationals. Unfortunately, the company archives are closed to researchers who want to study the tax behaviour of the oil giant. However, public sources and the press provide sufficient information. Archives of ministries, of the Supreme Court, and of the bank Nederlandsche Handel-Maatschappij (NHM) have been consulted in the National Archives in the Hague. Other sources were Parliamentary papers, plus newspapers and magazines from the Netherlands and the Dutch dependency Curaçao. In addition, existing studies have also been used. Various cases from 1914 up to 1974 have been analysed. The article’s starting point is 1914, because the oil company received its first tax advantages on Curaçao in that year, and the end point is 1974, due to the limitation on space. The cases occurred in the Netherlands, the Dutch dependency Curaçao, and tax havens.

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Avoiding Dutch Taxes Via a ‘Trick’ An attempt by the Royal Dutch Petroleum Company (hereafter Royal Dutch) to avoid taxation via an amendment of its statutes drew a lot of press attention in the Netherlands in 1919. Expressions like ‘trick’, ‘manipulation’, and ‘pickpockets’ were used.1 For a better understanding of this affair, the background to it needs to be examined in more detail. Royal Dutch and the Shell Transport and Trading Company of the United Kingdom (abbreviated as Shell) merged in 1907 and formed the Royal Dutch Shell Group (shortened to Royal Dutch Shell). The two merger parties were holding companies, i.e. they had no real business, but only shares in several domestic and foreign companies, from which they received dividends. In addition to the already existing sales company Asiatic Petroleum Company, Royal Dutch and Shell then established two new operating companies: in the Netherlands the Bataafsche Petroleum Maatschappij (hereafter Bataafsche), and Anglo-Saxon in Britain. Royal Dutch possessed 60% of the operating companies’ shares, whereas Shell held 40%. The dividends of the operating companies were allocated as 60% to Royal Dutch and 40% to Shell (Oppenheim 1923a, 276; Takken 1923, 411). The tax that Royal Dutch had to pay yearly to the Dutch tax authorities was largely based on the dividends that it received from Bataafsche and Anglo-Saxon. As Bataafsche had already paid taxes in the Netherlands on its income, Royal Dutch was exempted from having to pay tax on the 60% it received from Bataafsche (participation exemption). This exemption was based on the law on dividend and royalty tax (Wet op de dividend— en tantièmebelasting, abbreviated as DTB), adopted on 10 January 1918. Yet, Royal Dutch had to pay taxes in the Netherlands on the 60% dividends of Anglo-Saxon, even though the profit from Anglo-Saxon had already been taxed in Britain. Based on the DTB legislation, Royal Dutch could have obtained an exemption of 50% on those foreign dividends if it would have possessed at least 90% of the Anglo-Saxon shares (Takken 1923). With ownership at the level of 60%, that was clearly not the case. Therefore, the oil company tried to circumvent the DTB provisions via a complicated construction.

1 De Nieuwe Financier en Kapitalist 18 Jul. 1919 and 25 Jul. 1919; De Tribune, 2 Aug. 1919.

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Amendment of Statutes Royal Dutch amended the statutes of Bataafsche at the end of December 1917.2 Those amendments went hand in hand with a modification of the Anglo-Saxon statutes, as well as an agreement with Shell. According to the amendments, Royal Dutch henceforth received 95% instead of 60% of the dividends from Bataafsche, and only 5% instead of 60% from AngloSaxon’s dividends. The agreement between Royal Dutch and Shell had to ensure that in the end both got what they were entitled to: Royal Dutch 60% and Shell 40%. If Royal Dutch received more, then a payment to Shell would follow; if it received less, then Shell had to pay Royal Dutch (Takken 1923, 412). According to the provisions of the DTB, Royal Dutch had to pay approximately 72,000,000 guilders of tax for the fiscal year 1918, but in the opinion of the oil company, no tax had to be paid. The company thought that it was entitled to a participation exemption of 95% for the domestic dividend payments of 90,000,000 it received from Bataafsche, according to the new statutes. That would provide a deduction of 85,500,000 guilders (95% × 90,000,000). With this deduction being greater than the paid amount of 72,000,000, it thus resulted in no taxation (Takken 1923, 412).3 Failed Attempt to Deceive the Tax Authorities The strategy set up by Royal Dutch failed. The tax office based the tax bill for 1918 on the distribution of the shareholdings—60% Royal Dutch and 40% Shell—and the resulting dividend allocation. As a result, Royal Dutch had to pay approximately 1,100,000 guilders in state taxes and over 400,000 in municipal surtaxes to The Hague, where Royal Dutch was established. Together this amounted to 1.5 million guilders.4 Royal Dutch took its case all the way to the Supreme Court. At the end of January 1923, the court found in favour of the tax office. In an article on the front page of the Nieuwe Rotterdamsche Courant of Sunday 11 March 1923, the judgement of the Supreme Court and the attitude of 2 Staatscourant, 25 Jan. 1918 nr. 21. 3 The 72 million guilders from 1918 would have the same purchasing power as 472

million euros in 2016 (Historical Prices 2019). 4 De Nieuwe Financier en Kapitalist (Algemeene Financieele Courant), 25 Jul. 1919.

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Royal Dutch was discussed. According to the article, Royal Dutch wanted to abuse the legislation via a sham agreement. The next day, Het Algemeen Handelsblad published exactly the same article. These two publications in liberal newspapers must have made a considerable impression, and most certainly in political circles, as on Tuesday 13 March this case was discussed in the Upper House. Senator A. W. F. Idenburg, a Conservative Protestant, expressed himself very positively about the judgement of the Supreme Court. This former minister further argued that ‘the taxman’s eye should not be deceived’.5 Other newspapers also supported the Supreme Court’s judgement. The Nieuwe Venlosche Courant of 17 March 1923, for instance, argued that the manipulation of Royal Dutch was in fact tax evasion. The only person that openly supported Royal Dutch was, as far as is known, A.S. Oppenheim. In a March 1923 article in Economisch – Statistische Berichten, he wrote, among other things, that taxation had become for a stock corporation the most important factor. Furthermore, he argued that the Supreme Court did not fully understand the complicated issue. He concluded his contribution by remarking that he would not be surprised if Royal Dutch would use other means to circumvent the consequences of the Supreme Court’s judgement. That Oppenheim defended Royal Dutch so strongly is hardly surprising, because he was professor at the Faculty of Law at Leiden until the end of 1922, after which he resigned and entered into the service of Royal Dutch as a legal adviser. His career with Royal Dutch went smoothly. In 1928 he was the chief representative of Bataafsche in the Dutch East Indies. A few years later he became head of the legal department of Royal Dutch. The position adopted by Oppenheim did not, however, remain unanswered. At the request of the editorial staff, J. Takken, who worked at the Ministry of Finance, responded in May 1923 in Economisch–Statistische Berichten (Takken 1923). He argued that the Supreme Court—luckily, he claimed—did not support Oppenheim’s opinion, ‘otherwise the door for tax evasion would be wide open’. Oppenheim’s answer came a week later. He wrote that a holding company such as Royal Dutch had the right to change the structure of the group to which it belonged, if it was more economical. That was, according to Oppenheim, an essential duty to the

5 Parliamentary Papers, the Netherlands, Upper House 1922–1923, Transactions 14 Mar. 1923, p. 319.

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stockholders (Oppenheim 1923b). This was a clear statement that Royal Dutch was looking for all possible ways to reduce its Dutch tax bill. The company first challenged the tax bills of 1919, 1920, and 1921 in court. The disputes actually related to the same issue, it was only the amounts that were different each year. When the Supreme Court, to the liking of Royal Dutch, took too long to reach a judgement, the company requested, in a letter dated 17 December 1923, for an ‘earliest possible’ treatment of the case, because otherwise the accounts of those years could not be closed, and that would be ‘very damaging’ for a big company such as Royal Dutch.6 Apparently sensitive to the pressure of Royal Dutch, the Supreme Court returned as early as 28 May 1924 with a decision; the court found in favour of the tax office again.7 When it became clear that the judicial path was closed, the oil company chose the political route. Political Influence That approach was successful. On 27 August 1925, the newly appointed Dutch Prime Minister, H. Colijn—a very conservative politician—introduced a bill in favour of the position taken by Royal Dutch.8 As the cabinet was only inaugurated on 4 August 1925, this was one of its first bills. In his cabinet, Colijn was not only Prime Minister, but also Minister of Finance (Bank and Vos 1987, 66, 73). The bill concerned an amendment to the DTB legislation. As previously stated, Royal Dutch was able to obtain an exemption of 50% on the foreign dividends of Anglo-Saxon if it possessed at least 90% of the Anglo-Saxon shares. However, it had only 60%. In the bill, the 90% limit was repealed and the exemption was raised to two-thirds.9 The Upper House approved the bill in November 1927. As a result, Royal Dutch was entitled to an exemption, thanks to ‘oil-man’ Colijn, who was director of Bataafsche in the period of March 1914–March 1922 (Bank and Vos 6 National Archives, The Hague (henceforth NL-HaNA), Supreme Court, collection nr. 2.09.28, inv. no. 553: letter of 17 Dec 1923 from lawyers to the Supreme Court. 7 NL-HaNA, Supreme Court, collection nr. 2.09.28, inv. no. 553: decision of the Supreme Court of 28 May 1924. 8 Parliamentary Papers, the Netherlands, Lower House 1924–1925, 438 Draft and Explanatory memorandum, 27 Aug. 1925. 9 Parliamentary Papers, the Netherlands, Lower House 1924–1925, 438 Draft and Explanatory memorandum, 27 Aug. 1925.

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1987, 45, 57). After leaving Bataafsche, the public still regarded him as the oil-man (de Graaff 1997, 168). The company used similar practices not only in the Netherlands itself but also in a Dutch colony. Tax Gifts on Curaçao After Royal Dutch Shell discovered important oil fields in Venezuela in 1914, the company decided to build storage tanks and a refinery on Curaçao, which together with other Caribbean islands, including Aruba, formed a Dutch colony. The choice of where to build fell on the island of Curaçao because of its beautiful natural harbours, its political stability, and its favourable location in relation to the newly opened Panama Canal. Due to its political influence in the Hague, the oil company was given a number of tax advantages quite quickly. The 3% import duty on oil was abolished in August 1914. A month later, the company was granted exemption from import duties for machinery, tools, and materials for the construction of crude oil storage facilities. At the end of 1914, import duties on materials for the construction of the refinery were abolished, and in March 1915, Bataafsche managed that materials for building, furnishing and maintenance of offices, hospitals, leisure areas and homes were also exempted. All these tax gifts were mainly due to the influence of two directors of Bataafsche: H. Colijn and C.M. Pleyte. The latter was a brother of the then Minister of Colonies, Th. B. Pleyte, whilst Colijn was at that time member of the Upper House. Prior to that, Colijn was a member of the Lower House, Minister of War, and Minister of the Navy (Jonker and Van Zanden 2007, 154; van Soest 1976, 166–169, 175; Biographical Archive of Politicians 2022). At the beginning of 1917, Bataafsche transferred all its activities on Curaçao to a separate Dutch subsidiary, the Curaçaose Petroleum Maatschappij (CPM). Colijn and Pleyte were charged with the management of that subsidiary. The transfer meant that Bataafsche had to pay a 2% transfer tax. The oil company considered that the original value of the land ownership (20,000 guilders) should be taken as a tax base. The tax administration wanted the taxation to be based on the real value of the land and everything built on it in the meantime, which would amount to about 1.5 million guilders. The transfer tax would then amount to 2% of 1.5 million, which would equate to 30,000 guilders. In the end, a ‘compromise’ was reached, with a tax base of 50,000 guilders (van Soest 1976, 191, 202, 203). The levy thus became 1000 guilders, or 3% of what the tax authorities originally wanted.

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Complicated Construction When the CPM started making substantial profits on Curaçao and could distribute dividends, it transferred its property to the Curaçaosche Petroleum Industrie Maatschappij (CPIM), which was founded in March 1925. For a better understanding of this decision, the background must be examined. To the outside world, it was an American company, General Asphalt, and its subsidiary, the Caribbean Petroleum Company (Caribbean in short), that operated the Venezuelan oil fields, and not the Royal Dutch Shell Group. That was because the Dutch and English were not so welcome in Venezuela after interventions by their countries in 1902 and 1908 (van Soest 1976, 164, 191, 236). Royal Dutch had bought all the rights of General Asphalt, but through a complicated construction the latter retained all the shares. However, Caribbean gave that share package in trust to Bataafsche. Although the CPM was a Dutch company, the shares were held in the United States, so the profits would also be taxed in the United States. Another important consideration was that the highest dividend tax rate on Curaçao was only 8%, which was very favourable to Dutch shareholders. As relations with Venezuela were apparently somewhat improved, the CPM could be replaced by the Curaçaose CPIM (van Soest 1976, 164, 235). Position of Power The tax concessions reflected the dominant position of the oil company. When the CPM had major expansion plans in 1923, it first wanted to ensure that all tax facilities granted in 1915 and 1916 would remain intact. The Minister of Colonies was approached, and shortly afterwards the CPM was given the security requested. When the Koloniale Raad (Colonial Council) discussed tax increases in 1926, a protest by the oil group was sufficient to remove the issue from the agenda. The following year, a proposal submitted to the Koloniale Raad to replace the 8% dividend tax with a gross profit tax of 10% was rejected, after representatives of the company protested to the Minister of Colonies (van Soest 1976, 308). The extremely flexible treatment of the oil company came to an end. This was due, among other things, to the economic crisis, which resulted in falling revenues for Curaçao’s Government. Another factor was that at the beginning of 1930 a new governor was appointed, B. van Slobbe. He was less indulgent of the oil company than his predecessors (van Soest 1976, 308, 309, 352, 353).

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Higher Taxes for the Oil Concern Van Slobbe confronted the CPIM relatively quickly, with remarkable data. The Aruba-based American oil company Lago (an abbreviation of Lago Oil & Transport Co.) paid 500,000 guilders profit tax for 1929. The CPIM paid only 128,000 guilders from much higher sales. The governor’s conclusion was that the profit and loss account of the CPIM was ‘a camouflage’ and that it had to pay more tax. Finally, it was agreed that the CPIM would pay 250,000 guilders yearly, beginning in the tax year 1931, on the basis of an uncontrolled statement of profits (van Soest 1976, 354, 355). In other words, this was a fictitious amount, because the financial books remained closed. The oil company could be satisfied with this. A definitive settlement of the profit tax came into being in 1938. The basis for taxation was now a fictitious profit of 0.95 guilders per 1000 kg of produced oil products. As a result, no inspection of the accounts was necessary (Metry 2006, 456; van Soest 1976, 433). With that the company’s victory was complete: it had achieved low tax and closed its financial books to the tax authorities. The fictitious profit arrangement remained valid until long after the Second World War. This was to the great satisfaction of the CPIM, of course, which became Shell Curaçao NV (Shell for short) in 1959 (van Soest 1976, 727 note 8).10 Tax Evasion of 100 Million Around 1970, a confidential report was circulating in government circles on the island. In that report, an official not only pointed out Shell’s significantly minimal tax payments, but he also stated that the company evaded taxes. The oil company had, from the end of the 1950s, abused the opportunities offered by its own insurance company on Curaçao. It was allowed to transfer part of the profits as premium payments, tax free, to its own insurance company. The reserves that were created in this way were necessary for any payments in the event of damages. If no damages occurred, and the reserves became too high, tax would have to be paid. In one way or another, Shell saw the opportunity in the 1950s to transfer abroad 200 million tax-free guilders from those reserves, presumably to 10 For practical reasons, it was decided to shorten Shell Curaçao to Shell in the following text, which relates to Curaçao.

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Europe. With a tax rate of 30%, this amounted to a tax evasion of 60 million guilders. This raises quite a few questions: Were the tax authorities aware? Were they misled by Shell in a sophisticated way? Nor is it clear why the tax authorities did not intervene, because there was apparently no limitation period, as J. Voges (a member of the Netherlands Antillean parliament) had already raised the issue in a meeting of the parliament in 1959. He also asked the Finance Minister more explicitly about the millions that disappeared. The minister replied then: ‘I don’t want to walk on thin ice’. According to the report, Shell repeated the same trick at least eight or nine times. In this way, Shell evaded a collective total of at least 100 million guilders in taxes on Curaçao. Finally, the report stated: ‘They abused our incompetence’ (Peeters 1980). The conclusion was, therefore, that the tax authorities were not able to cope with the fiscal knowledge and financial dexterity of the oil giant. This was probably the case, but another factor was undoubtedly the company’s power. It has now been shown how Shell drastically reduced its tax burden by using its dominant position, its complicated fiscal structures, and its sometimes misleading practices. Another way it used was to set up letterbox companies in tax havens.

Using the Tax Haven of Curaçao At the beginning of the 1950s, the tax haven of Curaçao was created, in which foreign investment companies only had to pay a maximum of 3% profit tax (Van Beurden and Jonker 2021, 71–73; Smeets 1985, 232). To benefit from this, Shell established two investment companies in Willemstad (the capital of Curaçao): the I.B.M. and the B.P.M. These two companies were discussed during negotiations between the Netherlands and the Antilles in March 1957, on the conclusion of a mutual tax treaty. The Dutch representative stated that he had the impression that Dutch interests were placed in investment companies, with the aim of avoiding or evading Dutch taxes. He also noted that it was not yet known whether there were Dutch interests in the I.B.M. and B.P.M., but he hinted that the Netherlands would investigate this (Kagie 1982, 103).11 Were these 11 Amigoe, 31 Oct. 1959; NL-HaNA, Kabinet Vice-MP / KabSNA, 2.10.41, inv. no. 1291: pp. 6 and 7 of the report about talks in Willemstad, period 20–25 March 1957; Parliamentary Papers, the Netherlands Antilles, 1959–1960, minutes No. 9, p. 362.

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comments the reason why Shell liquidated the I.B.M. and B.P.M. in the late 1950s and moved the investments to Bermuda? It is of course also possible that the company preferred Bermuda because that tax haven did not have a profit tax. The Dutch oil families, such as Kessler and Loudon, who, as holders of preference shares, had a lot of power at Royal Dutch, also found their way to Curaçao. An example of this was in 1953, when J.H. Loudon Esquire was commissioned to establish the investment company La Buena Esperanza (shortened as Esperanza) in Willemstad in 1953.12 He owned all the shares of that letterbox company.13 Loudon, a major shareholder and President of Royal Dutch, was one of the first to use Curaçao. The low rate of 3% profit tax for foreign investment companies was only introduced on Curaçao at the end of 1952.14 The securities division of the bank NHM, in Amsterdam, issued an investment opinion twice a year on the composition of the securities portfolio, which was held in Esperanza.15 The portfolio consisted of shares of Royal Dutch, as well as American and Canadian securities.16 Neither expenses nor efforts were spared in the shielding of all the activities around Esperanza from the outside world. For example, the NHM Trust Office at Curaçao was ordered to transfer assets from the mailbox company to account number 30546 of the asset management company Pictet & Cie, in Geneva. The order explicitly stated that this must be done: ‘without mentioning a name’.17 Loudon was thus using the notorious anonymous Swiss numbered account system to achieve maximum secrecy. Loudon

12 NL-HaNA, NHM, 2.20.01, inv. no. 13881: letter of 29 June 1961 to Trust Office Curaçao from Management Board; inv.nr. 13,880: letter of 13 Jan. 1960 to Trust Office from Management Board. 13 NL-HaNA, NHM, 2.20.01, inv. no. 13880: letter of 15 Jul. 1960 to Trust Office Curaçao from Management Board. 14 NL-HaNA, NHM, 2.20.01, inv. no. 13876: letters of 29 Dec. 1952 and 26 Feb. 1953 from Trust Office Curaçao to Management Board. 15 NL-HaNA, NHM, 2.20.01, inv. no. 13885: letter of 12 Jan. 1960 to D. de Bruyne from Management Board. 16 NL-HaNA, NHM, 2.20.01, inv. no. 13880: letter of 31 Dec. 1959 to Trust Office Curaçao from Management Board. 17 NL-HaNA, NHM, 2.20.01, inv. no. 13880: letter of 11 Feb. 1960 to Trust Office Curaçao from Management Board.

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also informed the trust office that he preferred not to submit a tax declaration concerning Esperanza in the United States, but if, according to advisers in America, this was absolutely necessary, he would accept it.18 Furthermore, Maduro’s Bank, a private bank established in Curaçao, which settled financial transactions for Esperanza in Willemstad, was explicitly not allowed to know that part of the portfolio went to Pictet in Switzerland.19 The correspondence concerning Esperanza was also well shielded. Only the biennial investment advices were sent to Loudon himself with his name on it. However, these advices did not go to his home address in London (the chic Grosvenor Square), but to a Shell office in that city (St. Helen’s Court). The rest of the mail went to the head office of Royal Dutch in the Hague, at Carel van Bylandtlaan, and was addressed to an intermediary, presumably an authorised representative (Grace’s Guide To British Industrial History 2020).20 In mid-1961 Loudon ordered the liquidation of La Buena Esperanza and the transfer of all assets to Pictet in Geneva.21 Why Loudon transferred those assets to Switzerland is not clear. His decision was undoubtedly influenced by the fact that the Netherlands Antilles had no statutory banking secrecy, but only a self-imposed secrecy of local banks and trust offices.22 Switzerland, however, had a very solid banking secrecy culture, and violation of the obligation of confidentiality was a crime there. In principle, a violation of the secrecy rules had to be prosecuted even if there was no complaint from the injured party (Guex 1999, 9). At any rate, the combination of that strong banking secrecy and the numbered account could at least keep Loudons’ millions out of sight of the fiscal authorities.

18 NL-HaNA, NHM, 2.20.01, inv. no. 13885: letter of 12 Jan. 1960 to D. de Bruyne from Management Board. 19 NL-HaNA, NHM, 2.20.01, inv. no. 13880: letter of 31 Dec. 1959 to Trust Office Curaçao from Management Board. 20 De Volkskrant, 13 May 1960; Het Parool, 23 Apr. 1965; NL-HaNA, NHM, 2.20.01, inv. no. 13885: letter of 12 Jan. 1960 to D. de Bruyne from Management Board. 21 NL-HaNA, NHM, 2.20.01, inv. no. 13881: letter of 29 June 1961 to Trust Office Curaçao from Management Board. 22 Parliamentary Papers, the Netherlands Antilles 2002–2003, Landsverordening toezicht trustwezen, Explanatory memorandum, p. 3.

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A ‘Sweetener’ of 35–100 Million At first it seemed that a Royal Dutch Shell subsidiary would quietly receive a substantial tax waiver from the Dutch state. A simple, unobtrusive bill in March 1973 effected that. Yet, an official of the Ministry of Finance, who believed this to be not correct, discreetly informed F. de Kam. This staff member of the Social Democratic party (PvdA) started the ball rolling. The result was that the Lower House only approved the bill by a narrow margin of two votes (de Kam 1977, 89–93). The issue was all about the subsidiary Compañía Shell de Venezuela (CSV). In that company, which was founded in Canada in 1953, all the properties and interests of the oil group in Venezuela were housed. As CSV in Canada obtained the status of a foreign business corporation, it did not have to pay corporate and dividend tax there. Due to its separate status, it was not a tax resident (Gibbon 1957, 71–73; de Kam 1977, 89).23 All shares of the CSV were held by the Dutch Bataafsche, who acquired the more modern name Bataafse in 1959 and eventually became Shell Petroleum N.V. in 1967 (Howarth and Jonker 2007, 125).24 The tax-saving construction was threatened because Canadian tax legislation would change in 1973. This meant that CSV became a tax resident of Canada and had to pay not only corporate tax, but also 15% withholding tax on dividend payments to the Netherlands. The corporate tax was not so much a problem, because it could be offset by the tax on profits paid in Venezuela, thus only the Canadian tax on dividends that went to Shell Petroleum N.V. remained. To find a solution for that ‘tax problem’, J.H. Diephuis, head of the legal department of the multinational, held a number of talks in 1972 at the Ministry of Justice in the Hague. That department proved willing to draw up a special law with which the CSV could become a Dutch company. That seemed to solve the ‘problem’, but the company’s tax experts then pointed to another ‘tax problem’ (de Kam 1977, 90).25

23 Parliamentary Papers, the Netherlands, Lower House 1972–1973, 12 333–3, 28-31973, Explanatory memorandum. 24 Parliamentary Papers, the Netherlands, Lower House 1972–1973, 12 333-3, 28-31973, Explanatory memorandum. 25 Parliamentary Papers, the Netherlands, Lower House 1972-1973, 12 333-8, 11-91973, Ministerial reply to final report.

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The Dutch Law on the taxation of legal transactions (Wet op belastingen van Rechtsverkeer) had entered into force on 1 January 1972. This meant that when CSV moved to the Netherlands, it had to pay 2% capital duty on its asset value. After a number of discussions at the Ministry of Finance, the levy was written off ‘on the basis of the special circumstances’. The waiver was laid down in a short note dated September 1972 to Diephuis, and signed by the then Undersecretary of Finance W. Scholten (de Kam 1977, 90–91).26 Many Members of Parliament had serious objections to the summary information provided by the Minister of Justice, A. van Agt, in the explanatory memorandum to the draft law. He failed to mention the tax background of the move, and stated that the law was necessary to prevent CSV losing its identity. He also made no mention of the waiver. It was only after much fuss that the short note about the waiver became an issue. The then Undersecretary of Finance, A. van der Stee, finally admitted that it was a substantial amount, which was certainly much higher than 35 million guilders, but probably lower than 100 million.27 The affair attracted a lot of attention. The headlines used expressions like ‘Gift’, ‘Shell-millions’, and ‘Shell-sweetener’.28 A large part of the Lower House wanted to vote against the bill. They thought that there was no basis for the promised waiver, because there were absolutely no special circumstances. Others did have great difficulty with the promise, but felt that a promise was to be honoured, however brief it was. For example, H. Koning (Liberal Party) had strong reservations, but he did not want to reconsider the promise. However, he thought that the company should consider paying the tax anyway.29 The draft law was adopted by a very small majority in the Lower House: 61 votes to 59. The liberals and the Christian parties voted in favour. The Democrats, the Social Democrats, and four smaller parties voted against. A. Goudsmit (Democrats) tipped the balance, as she was the only one in 26 Parliamentary Papers, the Netherlands, Lower House 1972-1973, 12 333-8, Transactions 11 Sep. 1973, p. 2467; 12 333-9, Annex to ministerial reply to final report. 27 Parliamentary Papers, the Netherlands, Lower House 1972–1973, 12 333–3, 28–31973, Explanatory memorandum; 1973–1974, Transactions 19 Sep. 1973, p. 34. 28 Trouw, 10 Sep. 1973 and 21 Sep. 1973; De Telegraaf , 14 Sep. 1973; Het Vrije Volk, 12 Sep. 1973. 29 Parliamentary Papers, the Netherlands, Lower House 1973–1974, 12 333, Transactions 19 Sep. 1973 pp. 23–28.

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her group to vote in favour. The promise was, in her view, disgraceful, but it had to be fulfilled.30 After the Upper House also gave its fiat, the bill came into effect.31 The oil multinational could, therefore, be satisfied with the outcome and most probably ignored the call of the liberal Koning to pay the tax.

Conclusion In this contribution it has been shown how Royal Dutch Shell reduced or tried to reduce its tax bills in the period from 1914 to 1974. The applied methods included artificial fiscal constructions, challenges to tax authorities’ decisions, hiding profits, using the secrecy and low tariffs of tax havens, outright fraud, and political influence. Of these methods, political influence was the most important. As a result, Royal Dutch achieved, in the first quarter of the last century, favourable legislation in the Netherlands and tax advantages on Curaçao. The political connections of the oil company with the Dutch state apparatus were strong: the Prime Minister H. Colijn was a former director of Bataafsche, and the Minister of Colonies had a brother who was a director of Bataafsche. About half a century later, the political influence of the oil giant in the Netherlands was as strong as it was before. The Department of Justice drew up a special law for the company and the Department of Finance granted a tax waiver of somewhere between 35 and 100 million guilders. Further research will almost certainly demonstrate that the tax-avoiding behaviour of the oil giant did not change after 1974.

Bibliography Bank, J., and C. Vos. 1987. Hendrikus Colijn: Antirevolutionair. Houten: De Haan. van Beurden, T., and J. Jonker. 2021. A Perfect Symbiosis: Curaçao, The Netherlands and Financial Offshore Services, 1951–2013. Financial History Review 28: 67–95.

30 Parliamentary Papers, the Netherlands, Lower House 1973–1974, 12 333, Transactions 20 Sep. 1973 p. 70; Trouw, 21 Sep. 1973. 31 Parliamentary Papers, the Netherlands, Senate 1973–1974, 12 333, Transactions 22 Jan. 1974 p. 300; Staatsblad 22 of 24 Jan. 1974.

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Biographical Archive Politicians. 2022. https://www.parlement.com/id/vg09lk z7m8z5/h_hendrik_colijn. Accessed 28 Jan 2022. Gibbon, W.J. 1957. Tax Factors in Basing International Business Abroad. Cambridge: Law School of Harvard University. de Graaff, B. 1997. ‘Kalm Temidden van Woedende Golven’: Het Ministerie van Koloniën en Zijn Taakomgeving, 1912–1940. Dissertation, University of Leiden. Grace’s Guide To British Industrial History. 2020. https://www.gracesguide.co. uk/ShellChemical_Co. Accessed 28 Jan 2022. Guex, S. 1999. Les Origines du Secret Bancaire Suisse et Son Rôle Dans la Politique De La Confédération au Sortir de la Seconde Guerre mondiale. Genèses 34: 4–27. Historical Prices. 2019. International Institute of Social History. https://iisg.ams terdam/nl/onderzoek/projecten/hpw/calculate.php. Accessed 28 Jan 2022. Howarth, S., and J. Jonker. 2007. Powering the Hydrocarbon Revolution, 1939– 1973: A History of Royal Dutch Shell. Oxford: University Press. Howarth, S., J. Jonker, K. Sluyterman, and J.L. van Zanden. 2007. A History of Royal Dutch Shell: Vol. 1: 1890–1939, Vol. 2: 1939–1973, Vol 3: 1973–2007, Vol 4: Appendices. Oxford: University Press. Izawa, R. 2019. Municipalisation, War, Tax and Nationalization: Imperial Continental Gas Association in an Era of Turmoil, 1824–1987. In Multinational Enterprise, Political Risk and Organisational Change, eds. N. Forbes, T. Kurosawa, and B. Wubs, 55–68. New York: Routledge. Jonker, J., and J.L. van Zanden. 2007. From Challenger to Joint Industry Leader, 1890–1939: A History of Royal Dutch Shell. Oxford: University Press. Kagie, R. 1982. De laatste kolonie. Bussum: Het Wereldvenster. de Kam, C.A. 1977. Betalen is Voor de Dommen: Over de Miljardenmazen in Ons Belastingstelsel. Amsterdam: Bert Bakker. Metry, F. 2006. De Geschiedenis van de belastingen in de Kolonie Curaçao en de Nederlandse Antillen. Curaçao: Stichting publicaties KPMG. Nijst, J.J.M.H. 1931. Luxemburg, Zwitserland of Liechtenstein? De Naamlooze Vennootschap 10 (1931–1932): 44–48. Oppenheim, A.S. 1923a. De Hooge Raad en de ‘Koninklijke’, Economisch– Statistische Berichten 28 Mar. 276–278. Oppenheim, A.S. 1923b. Heer Takken, De Hooge Raad en de ‘Koninklijke’, Economisch–Statistische Berichten 16 May 438–439. Peeters, F. 1980. Antillen route 4. Vrij Nederland, Feb. 9. Smeets, A.A.G. 1985. Ontwikkeling van de Offshore-Activiteiten op de Nederlandse Antillen. In Opstellen ter gelegenheid van het 100-jarig bestaan van de Kamer van Koophandel en Nijverheid te Curaçao, ed. O. B. Linker, 229–255. van Soest, J. 1976. Olie Als Water, De Curaçaose Economie in de Eerste Helft van de Twintigste Eeuw. Curaçao: Hogeschool Nederlandse Antillen.

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Spoerer, M. 2019. Go West: C&A’s Motives and Strategies for Expansion From Europe Into the Western Hemisphere, 1945–1962, In Multinational Enterprise, Political Risk and Organisational Change, eds. N. Forbes, T. Kurosawa, and B. Wubs, 69–86. New York: Routledge. Takken, J. 1923. De Hooge Raad en de ‘Koninklijke’. Economisch –Statistische Berichten 9 May: 411–413.

CHAPTER 6

Swedish Emigration to Switzerland in the 1960s–1980s Period: Tax Exile and Settlement Choices Thibaud Giddey and Mikael Wendschlag

In 2021, Sweden and Switzerland were ranked among the top 10 countries and territories with the highest concentration of billionaires per capita in the world.1 Switzerland has long been a home for the superrich, but in the case of Sweden, this is a rather more recent phenomenon, 1 The World’s Billionaires’ Ranking, Forbes, April 2021: Switzerland, nr. 7: 40 billionaires, Sweden, nr. 9: 41 billionaires.

T. Giddey (B) University of Lausanne, Lausanne, Switzerland e-mail: [email protected] University of Oxford, Oxford, UK M. Wendschlag Uppsala University, Uppsala, Sweden e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_6

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initiated by the 1990 reform of the tax code. In the decades after World War II, Sweden had taxes that were among the highest in the world, with strong progressive features. Wealthy Swedes had strong incentives to avoid, or even evade, paying Swedish taxes. One way to do this was to emigrate and to be domiciled in a low-tax jurisdiction. Located in the middle of Europe, Switzerland offered, among other things, close proximity to other countries and cities of business and leisure in ways that wealthy Swedes in Sweden could not enjoy to the same degree. The social attitudes towards wealth and the wealthy also differed considerably between the two countries in the decades after the war. The high tax rates, and the widespread criticism of the wealthy and of displays of opulence, were put forward as explanations to why many famous Swedes emigrated to Switzerland during this period, among them the famous entrepreneurs Ruben Rausing (1895–1982, Tetra Pak) and Ingvar Kamprad (1926–2018, IKEA). In some ways, the countries were similar during this period (Tanner 2020, 4–43). Both maintained neutrality during the world wars and the Cold War era, and were spared many of the substantial human, material, and institutional destruction that most of the rest of Europe endured. These conditions contributed to effective tax systems and a high level of trust in the state compared to most other countries after the war. In both countries, the standard of living was high; for the wealthy it was even higher in Switzerland. Economically, both countries experienced a ‘golden age’ of economic growth in the decades after the Second World War, with low unemployment rates, sound public finances, and private business sectors dominated by large export-oriented multinational companies successfully competing in international markets. Diplomatic relations were also good between the two countries, and both nations accepted immigration from each other (and from other states as well). In terms of tax rates, tax culture, and attitudes towards wealth and the wealthy, the countries, however, were at the opposite ends of the spectrum. According to OECD figures, the tax-to-GDP ratio was much higher in Sweden than in Switzerland. In Sweden, this ratio grew from 33% in 1965 to 38% in 1970, 41% in 1975, and 46% in 1980. In Switzerland, the same ratio increased from 17% in 1965 to 19% in 1970, 24% in 1975, and 25% in 1980.2 Sweden counted as one of the countries where 2 OECD, Revenue Statistics 1965–2008, Paris: OECD, 2009, pp. 75–78 (Tax Levels and Tax Structures, 1965–2007, Table 3 Comparative Tables).

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the tax system grew more progressive throughout the twentieth century (Piketty and Saez 2007; Lantz 2021). In Switzerland this trend was much weaker. In addition, the attitude towards wealth and the wealthy differed between the countries. In Sweden, where the Social Democratic party formed every government from the mid-1930s until the late 1970s, the wealthy and displays of wealth and conspicuous consumption were viewed with suspicion in the post-war decades compared to other countries and later periods. The rich and famous who moved to another country, such as the above-mentioned, were subject to critical newspaper coverage, where they were portrayed as unpatriotic tax evaders. A new expression was coined at that time to designate wealthy Swedish emigrants who had moved for tax reasons. In the media, as well as in political debates, the term ‘Skatteschweizare’, literally Swiss by tax, or tax refugee in Switzerland, became synonymous with the larger community of Swedes living abroad to avoid high Swedish taxes.3 The ‘Skatteschweizare’ were said to act unpatriotically, unwilling to contribute to Swedish society and suspected of engaging in tax evasion. By comparison, the wealthy and displays of wealth did not receive the same type of social outrage or criticism in Switzerland. A connected cultural difference was reflected in the attitude to privacy of information. It has recently been argued that secrecy, as a core value, is closely linked to the maintenance of wealth and inequalities (Harrington 2021). While Swedish society put the principle of free access to public information—about individuals, businesses, and the state—on a pedestal, Swiss society heralded the right to privacy equally highly. The well-known bank secrecy regime in Switzerland—which justified a non-cooperative attitude of the Swiss administration regarding the exchange of information with foreign authorities—reflected the latter. A bank secrecy act existed in Sweden as well, but the banks were expected to comply with the authorities in criminal cases, such as regarding tax evasion. Given the countries’ differences in their taxation and their attitudes towards the wealthy, we want to investigate the emigration patterns from Sweden to Switzerland in the 1960s–1980s period. Based on the literature

3 The term ‘skatteschweizare’ was used by the Social Democratic Prime Minister Olof Palme to blame the Swedish expatriates for deciding the tight general election of 1979, which resulted in a Conservative majority. Henrik Oscarsson, ‘Utlandröstande’, in Svenska Utlandsröster SOM-Undersökningen till Utlandssvenskar 2014 SOM-Rapport Nr 65, ed. Maria Solevid (SOM-institutet, 2016), 259–285.

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on settlement choices and tax mobility, wealthy Swedes appear to have had incentives to move to a low-tax jurisdiction that also offered a high quality of life and opportunities to interact with other people possessed of the same economic circumstances. With comparatively low taxes, especially for wealthy tax migrants, Switzerland started to develop into a tax haven before the First World War, which became one of the most prominent in the world during the twentieth century (Farquet 2016; Ogle 2017; Guex 2021). The Swiss emphasis on privacy was likely to be of further appeal. Based on lists of all Swedes living in Switzerland in the 1960s–1980s, put together by the Swedish Embassy in Berne, we will investigate the settlement choices of wealthy Swedes in light of the literature. Our aim is to contribute to the research on the settlement choices of the wealthy and on international tax avoidance and evasion. Concretely, by mapping the settlement of Swedish expats to the canton and municipality level, we can investigate to what degree the settlement choices relate to local tax rates, and if the wealthy favoured settlement close to other wealthy individuals. In the next section, we provide a brief account of the research on the settlement choices of the wealthy. In section “Sources and Data” we describe the material we use for our investigation. Section “Taxation in Sweden and Switzerland—An Overview” describes some differences between the Swedish and Swiss tax systems. Section “Swedish Immigration in Switzerland” provides an overview of emigration and immigration between the two countries. Section “Tax Rates in the Swiss Cantons” describes the tax systems in the Swiss cantons. Our investigation follows in sections “Settlement of Swedes in Swiss Cantons”, “Swedes as Important Lump-Sum Taxpayers”, “The Clustering of Swedes in Switzerland and Their Socio-Economic Background”. The paper concludes in section “Conclusion” with our findings, and a discussion of how they relate to the research field.

Settlement Choices of the Wealthy---to Minimise Taxes or to Live with Other Wealthy People? The question of how, and if, differences in tax rates affect settlement choices of tax entities has been studied across a large body of research. Economists have been especially concerned with the fiscal policy implications. Tax rates in one jurisdiction may be dependent on tax rates in another if tax entities move freely to wherever they face the lowest

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taxes—given that the costs of moving are low. Tax evasion and avoidance could also be considered an outcome in a mere cost–benefit calculation (Slemrod and Yitzhaki 2002). However, if this hypothesis has a strong foundation in neoclassical economic theory, the empirical support for this has been mixed. Feldstein and Vaillant Wrobel find evidence that ‘individuals can avoid unfavourable taxes by migrating to jurisdictions that offer more favourable tax conditions’ (Feldstein and Wrobel 1998). Young, among others, however, highlights that the rich’s choice of settlement is more based on access to social and business networks, opportunities, and sources of influence (Young 2017). Moving abroad or to another jurisdiction often implies losing access to those power assets. Afonso studies the relationship between changes in state-level income taxes and flows of migration through data on the respective circumstances before and after Connecticut’s 1991 tax reform (Afonso 2018, 113). He finds that the adoption of an income tax ‘deterred movement into the state but had no impact on exit from the state’. In this case, the costs of moving were higher than the benefits of relocating to a state with lower or no income tax (Afonso 2018). One reason is the difficulty to come by empirical data that allow for studies of tax-induced mobility. Kleven and co-authors note that it is generally difficult to access sufficiently detailed data either on migrants or about the tax systems concerned (Kleven et al. 2020). Tax systems are complex hives of many different taxes, rates, modes for calculation, etcetera, which makes comparisons with other tax systems complicated. Regarding information about the individuals of interest, most countries do not keep—or make available—detailed financial information that researchers can employ. The research has therefore come to focus on very recent years and special categories of population, such as top football players or inventors (Kleven et al. 2013; Akcigit et al. 2016), or the top 1% of international immigrants in Denmark (Kleven et al. 2014). While scholars agree on the fact that taxation can affect people’s residential choices, broad empirical evidence is still lacking in terms of being able to sufficiently measure the strength of the mobility response. The research focused on very wealthy individuals’ mobility has pointed out a few specifics about the behavioural migration patterns of the very rich (Sanandaji 2014; Young et al. 2016). Even for billionaires, other factors such as geographical, cultural, linguistic, and political proximity to their country of birth matter in their residency choices. Very wealthy

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taxpayers’ willingness to relocate to lower-tax jurisdictions is also affected by family responsibilities and business ownership, which embed individuals in their local regions. Social capital and network ties, which become increasingly important as people advance in their careers, often remain place-specific and make the decision to leave for tax reasons costlier. Generally speaking, other factors than tax-related determinants influence settlement choices, such as the provision of public goods and services, the presence of international private schools and private clinics, or the proximity of an international airport. Indeed, there may be many reasons why a specific residence would be chosen, such as the settlement of an employer. In 1970, a survey of Swedish companies’ international subsidiaries found that there were 64 subsidiaries established in Switzerland, comprising 6% of all foreign subsidiaries of Swedish companies (in industrialised countries). A quarter of the largest industry companies had their European subsidiary established in Switzerland. The main explanations discussed for Swedish multinational corporations establishing subsidiaries in Switzerland and other low-tax jurisdictions are the opportunities to operate in a tax-reducing internal price setting.4 With these settlements came some Swedes who for a longer or a shorter time relocated in Switzerland. Similarly, many international non-government organisations have offices or headquarters in Switzerland, which can explain the settlement of some Swedish expatriates. The UN and its specialised agencies, the World Trade Organization, the International Labour Organization, the World Health Organization, the Red Cross, and many others have headquarters in Geneva (Herren 2016). In addition to international organisations, some multinational companies combining Swedish and Swiss elements have domiciled in Switzerland and are an additional factor that could generate Swedish immigration. The 1988 merger of two leading electrical engineering companies, the Swedish ASEA and the Swiss Brown Boveri, to form ABB, is the most famous case (Barham and Heimer 1998). Another noteworthy example is Crypto AG, a company specialising in communications and information security, founded by Boris Hagelin in Stockholm in 1932, which was relocated to Zug, Switzerland in 1952, mainly for tax reasons 4 Statens Offentliga Utredningar 1975, 50 Internationella koncerner i industriländer— Samhällsekonomiska aspekter, Betänkande av Koncentrationsutredningen.

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and favourable patent rights regulations (Tanner 2020, 30; Strehle 2020). Technological developments may have improved the opportunities to move taxable assets to other jurisdictions by the late twentieth century, but during our period, and between Sweden and Switzerland, we believe that the migration option was attractive to wealthy Swedes as a method to minimise their taxes. And so, if tax emigration was partly a cost–benefit calculation, we presume that the Swedish tax migrants to Switzerland in this period preferred to live in one of the lowest-taxed cantons.

Sources and Data We base our investigation on a new database constructed from information about Swedes in Switzerland, contained in a number of archives in Sweden and Switzerland. Reflecting the high degree of transparency of Swedish society, the archives of the Swedish Foreign Office provide information about the names, professional titles, and addresses of all Swedes— those known to the Swedish Embassy in Berne—living in Switzerland. These lists were compiled for some years during our period, and we can use this information to further explore the issue of Swedes’ settlement choices. The main period of our research is the 1960s to the 1980s. The Swiss authorities kept records in this period of the aggregate number of foreigners residing in the country, including Swedes. These data allow us to map the Swedish population per canton for every ten years between 1950 and 2000. The Swiss records also provide us with tax rate indexes, calculated for all cantons for our period. We can thus combine these sources to allow us to begin exploring possible links between settlement choices and tax rates. In addition, we also try to account for the significance of the lump-sum tax regime for foreigners. This system allowed wealthy foreigners who were not gainfully employed in Switzerland to pay taxes not according to their real income or wealth, as in the regular regime, but calculated and pre-negotiated on the basis of the cost of living expended by the taxpayer. A 1964 federal source provides a first understanding of the significance of this system and the share of Swedes using it. Our unique database allows us to address the issue of the importance of tax rates for migration.

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Taxation in Sweden and Switzerland---An Overview In some ways, Sweden and Switzerland came out of the Second World War on similar terms, having successfully stayed neutral in military terms and thus having economies comparatively intact and ready for a return to peace-time business (Flury-Dasein 2004). During the golden era of economic growth, high taxes were generally accepted by the Swedish population, as they translated into investments in the welfare state and a generous social security system. By the late 1960s, and especially after the first oil price shock, the golden age of growth came to an end, however. The political response was to raise taxes even higher, which made the public’s acceptance of the taxes fall. The acceptance of tax avoidance grew, especially among the self-employed (Vogel 1974). By the mid-1970s, the top marginal rate could sometimes exceed 100% because some deductions could only be claimed the year following the increase of earnings, as deplored by Astrid Lindgren, author of children’s books, in a famous allegory in 1976 (Henrekson 2017, 34). The existence of high taxes was an often-stated motive for tax emigration by famous and wealthy Swedes during this time. Tax evasion by migration became a growing source of concern to the authorities, and the response was more investigations and prosecutions (Giddey and Wendschlag 2022). Switzerland showed a quite different picture with regard to tax culture and tax avoidance/evasion. The country has been identified as a state-containing regime: limited public and welfare expenditures, with a preference for taxes on incomes, and earnings from property and wealth over consumption taxes (Hürlimann 2017). After World War II the country continued to develop as an attractive jurisdiction for international businesses, as well as for wealthy individuals (Longchamp 2014, 821–836). The Swiss tax system allowed for preferential taxation for wealthy foreigners or multinational companies. The federalist structure also induced an inter-cantonal tax competition, which led to a form of a fiscal ‘race to the bottom’ to attract large taxpayers. The tolerance and complacency towards tax evaders were strengthened by Swiss law, which established a difference between tax avoidance (Steuerhinterziehung ), i.e. the simple fact of forgetting to declare assets, and tax evasion (Steuerbetrug ), which means an active falsification of documents. Mere tax avoidance, although considered a misdemeanour and punished by a fine, was not penalised by criminal law. This subtle distinction allowed, until 2009, for the non-cooperative attitude of Swiss authorities towards

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requests for legal or administrative assistance from a third country, and played a role in the development of Switzerland as a tax haven. The farreaching bank secrecy regulations further built the country’s fame as a tax haven (Guex 2000, 2021). As a paradigmatic example of fiscal federalism featuring a high degree of tax decentralisation, Switzerland as a case study has attracted a lot of attention from economists interested in the empirical analysis of taxinduced behaviours (Schmidheiny 2017; Brülhart et al. 2018; Schmidheiny and Slotwinski 2018). The varying tax rates and tax systems, which differ from canton to canton, and even within a canton, from municipality (also called commune in Switzerland) to municipality, allow those scholars to conduct ‘difference in differences’ analysis in the case of important changes in one of the tax regimes. This growing body of literature has identified how rising mobility and inequality challenge fiscal federalism. Furthermore, ongoing research on the super-rich in Switzerland—the number of billionaires residing in Switzerland growing from 45 in 1993 to 128 in 2020—during the past 30 years provides a first attempt at measuring the importance of the preferential tax regime for wealthy foreigners (expenditure-based lump-sum taxation) and their location choices (Baselgia and Martínez 2022).

Swedish Immigration in Switzerland During the decades after the Second World War, circa 20,000–30,000 individuals emigrated from and immigrated to Sweden annually. The flows from and to Switzerland comprised about three per cent of these individuals, with the Swedish emigration to Switzerland exceeding immigration for most years during our period. The exceptions were 1976, 1977, and 1978—the latter year standing out for having very low emigration and immigration numbers in total. The emigration surplus was the highest in the early period. In 1971, a total of 761 men and women emigrated from Sweden to Switzerland, while 342 moved the other way (these figures are for all nationalities changing country of residence, and so they do not concern people with Swedish citizenship exclusively) (Table 6.1).5

5 Statens Offentliga Utredningar 1975, 50 Internationella koncerner i industriländer, samhällsekonomiska aspekter. Betänkande av Koncentrationsutredningen, Göteborgs Offsettryckeri, Stockholm.

702 305 397

1972 687 313 374

1973

Source Statistiska Centralbyrån, SCB, Inrikes och utrikes flyttningar 1972–1982

761 342 419

1971 474 344 130

1974 372 362 10

1975 363 429 -66

1976

304 377 –73

1977

Swedish emigration and immigration to and from Switzerland, 1971–1981

Emigration from Sweden to Switzerland Immigration from Switzerland to Sweden Net emigration

Table 6.1

92 93 –1

1978

331 252 79

1979

414 274 140

1980

375 243 132

1981

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Switzerland was an attractive destination for foreigners seeking to avoid high income, capital, or inheritance taxation, including wealthy Swedes, who faced very high taxes in international comparison. During the late 1960s, the changes in progressivity and the rise of marginal tax rates, combined with greater possibilities of tax planning (including professional tax advisors), furthered the incentives of wealthy Swedes to emigrate. Between 1965 and 1989, around 30,000 Swedes of some wealth emigrated from Sweden. For the wealthiest, Switzerland was one of their favoured destinations in the first decades after the Second World War. Under the Swedish regime of currency control, individuals wishing to export a certain amount of Swedish crowns had to obtain an authorisation from the Swedish central bank. The aggregate data on the authorised emigration of wealthy Swedes was compiled by Lindkvist focusing on the wealthy emigrants declaring one million SEK or more to the Riksbank (Lindkvist 1990). Table 6.2 shows that Switzerland was the prime destination for wealthy Swedish emigrants from the mid-1960s until the mid-1970s. The peak was in the early 1970s, when the total number of wealthy emigrants peaked as well. The fall in the Swiss share from the mid-1970s may be linked to growing Swiss restrictions regarding settlement permits for foreigners. It could also be a response to the intensified pursuit of tax evaders in Sweden from the mid-1970s, which could explain the overall drop in wealth emigrants during this period, from 440 to circa 250 per year (Giddey and Wendschlag 2022). According to Lindkvist’s data, a total of 144 tax emigrants, with an authorised export amount of over one million kronor, moved to Switzerland during the 1970s. The demographic data for the same period indicate that the Swedish community grew by 497 individuals. Crossing those two sets of data suggests that at least 29% of Swedish emigration to Switzerland in the 1970s was concerning wealthy citizens, and thus was presumably tax-driven. The demographic data based on the decennial population census conducted in Switzerland provides another dataset with which to grasp the development of the Swedish colony in Switzerland and its regional distribution. The number of Swedish citizens in Switzerland grew continuously between 1941 and 2000. The sharpest increase happened in the 1940s (+126%), the 1950s (+183%), and the 1960s (+134%). The 1980s growth rate is also important (+39%). The Swedish community did not only grow

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Table 6.2 Swedish emigrants with Riksbank permission to move more than one million SEK out of the country, number, per cent and country of destination, 1964–1984 Years of emigration −1964 No

%

1965–1969 No

Switzerland 75 33 60 Great 12 5 13 Britain France 28 12 14 Spain 13 6 29 Other 101 44 61 Total 229 100 177

1970–1974

1975–1979

1980–1984

Total

%

No

%

No

%

No

%

No

34 7

117 22

27 5

27 30

11 12

16 69

6 27

295 22 146 11

8 16 34 100

86 89 126 440

20 20 29 100

71 28 92 248

29 11 37 100

55 28 85 253

22 11 34 100

254 19 187 14 465 35 1347 100

%

Source Lindkvist (1990, 108), Tabell 19. Antal rika emigranter från Sverige enligt Riksbankens register över tillstånd för utförsel av emigrantvaluta

in absolute numbers, but also increased relative to the total foreign population (blue line, secondary axis): from 0.1% in 1941 to 0.41% in 2000. This is especially true for the 1970s, when the overall foreign population stagnated in Switzerland while the Swedes still grew (Mahnig and Cattacin 2005, 135–159). Figure 6.1 shows an important Swedish settlement in the Lake Geneva region (Geneva and Vaud) and in Zurich. Those three cantons are the only ones to have maintained a constant share of the total Swedish population above 10% of the total Swedish community. A low-tax canton like Zug moved from 1.75% of Swedes in 1960 to 4.03% in 1970 and 6.18% in 1980. The share of Swedes among the foreign population in the canton of Zug, the only canton where Swedes constantly represented more than 1% of the foreign population between 1970 and 2000 (the average in Switzerland is 0.37%), confirms the over-representation of Swedes in this cantonal tax haven.

Tax Rates in the Swiss Cantons The Swiss cantons and municipalities enjoy significant discretion over the tax rates that individuals and legal persons pay, and the differences between the 25–26 cantons are quite large, as shown by the tax rate index calculated annually by the Swiss federal tax authorities. The index

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SWEDISH EMIGRATION TO SWITZERLAND …

7000

0.45

5854

0.4

6000

0.35

4995 5000

0.3 3577

4000

0.25

3081

0.2

3000

0.15

2000 1000

123

1315 204

0.1

463

0.05

0

0 1941

1950

1960

1970

1980

1990

2000

Lake Geneva Region (GE, VD, VS)

Espace Mittelland (BE, FR, JU, NE, SO)

Northwestern Switzerland (AG, BL, BS)

Zurich

Eastern Switzerland (AR, AI, GL, GR, SG, SH, TG)

Central Switzerland (LU, UR, SZ, OW, NW, ZG)

Ticino

Swedes as share of total foreigner population

Fig. 6.1 Swedish community in Switzerland, by region (1941–2000) (Source Office fédéral de la statistique, Recensement fédéral de la population)

relies on an average income and wealth tax burden for individuals. The actual tax burden could be influenced by several other factors, however, not least by the municipal tax rates and admissible tax deductions. More importantly, the general tax burden for ordinary citizens was probably not the most relevant determinant in the choice of a settlement canton for a wealthy Swede in the periods highlighted. As mentioned earlier, and as also explored by Vivien Ballenegger’s contributions to this volume in Chapter 3, a number of Swiss cantons provided a special tax regime for wealthy foreigners who were not gainfully employed in Switzerland. This so-called lump-sum taxation system, similar to the ‘non-dom’ regime used in the UK, allows foreign taxpayers to be taxed on the basis of the estimated annual cost of living, rather than on their income. This preferential tax regime was particularly attractive, not only because of the significant or, for the super-rich, huge decrease of the tax burden, but also because such a tax deal reduced the costs and publicity of the tax filing in return for a regular income. Vaud, Geneva, and to a lesser extent Ticino were the main cantons applying such a lump-sum tax regime for foreigners during our period. In 1949, 1500 lump-sum taxpayers resided in Vaud, 1000 in Geneva, and only 80 in the rest of Switzerland (Gubler 1949). In 1973, out of 4000 foreign lump-sum taxpayers, Vaud hosted 2400 of them, Geneva

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1000, and Ticino 285 (the three cantons accounting for 92%).6 In 1999, the same three cantons still hosted 2077 out of 3098 lump-sum taxpayers (67%) (Lüthi 2017). By then, other alpine cantons such as Valais (500), Graubünden (214), and Berne (100) had become ‘new’ important lumpsum tax shelters for foreigners.

Settlement of Swedes in Swiss Cantons The bubble charts presented in Fig. 6.2 combine three variables: the demographic data on Swedish settlement, the tax burden index, and the existence of the lump-sum tax regimes for the years 1960, 1970, 1980, and 1990. The tax index is an estimate of the tax rates on wealth and income produced by the federal tax authorities. The country average is set at 100, and cantons with tax rates lower than the average have an index below 100, and vice versa. The colour code indicates the availability of lump-sum tax regimes for wealthy foreigners: the green bubbles are cantons offering preferential expense-based tax regimes, while those in blue do not. Swedish citizens were constantly disproportionately present in the cantons of Vaud and Geneva. As of 1970, the canton Zug, which developed an active policy of fiscal attractiveness for individuals and corporations, became a canton with a high over-representation of Swedes; in 1980, for example, Zug hosted 6.2% of Swedes living in Switzerland (the 4th largest cantonal share), while welcoming only 1.1% of foreigners resident in Switzerland in general. As evident in the figures above, the tax index differed significantly for different cantons, with a weak trend towards harmonization for the latter years (index closer to the country average, 100). The figures above also show that cantons changed their relative tax burden over time. For example, in 1960 Basel-Stadt had the lowest tax index, at 70, but by 1980 its index was 99, the country average. Reversely, Schwyz was at the country average in 1960, but became the canton with the second-lowest index in the 1980s. The size of the bubbles in the charts represents the share of all Swedes in Switzerland, living in each canton. The total Swedish population in Switzerland grew from 1314 in 1960 to 4989 in 1990, and as a share of all foreign citizens from 0.22 to 0.4%. A large share of the Swedes lived in the 6 Bulletin sténographique du Conseil national, Réponse de Nello Celio à Motion Reich, Pauschalsteuer Abschaffung, 04.06.1973, pp. 450–451.

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125

1960 140 130

Vaud

Bern

Tax index

120 110 100

Zürich Zug

90 80

Geneve

70 60

Basel-Stadt

1970 140 130

Vaud

Tax index

120 110 100

Geneve Zug

Bern

Ticino

90 Zürich

80 70 60

Basel Stadt

Tax index

1980 140 130 120 110 100 90 80 70 60

Vaud Geneve

Bern

Basel-Stadt Zürich Nidwalden Schwyz Zug

Fig. 6.2 Distribution of Swedes in Swiss cantons by tax index, 1960–1990 (Sources Swedish population: Office fédéral de la statistique, Recensement fédéral de la population; Tax index: Steuerbelastung in der Schweiz/Charge fiscale en Suisse, Eidg. Steuerverwaltung, Aministration fédérale des contributions; Lumpsum taxation for cantons [colour code]: 1964: Bericht über die Veranlagung zur Pauschalsteuer gem. Art. 18 bis WSTB pro 12. Periode [Steuerjahre 1963 und 1964], 1973: Bulletin sténographique du Conseil national, Réponse de Nello Celio à Motion Reich, Pauschalsteuer Abschaffung, 04.06.1973, pp. 450–451, 1983: [Bernasconi 1983, 90], 1999: Die Finanzdirektorenkonferenz [FDK] zur Aufwandbesteuerung, 2009)

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1990

140 130

Vaud

Tax index

120

Geneve

110 100

Bern Zürich

90 80 70

Schwyz Zug

60 50

Fig. 6.2 (continued)

urban cantons of Basel (Stadt and Landschaft), Berne, Geneva, Zürich, and Vaud throughout the period. At the beginning of the period, most Swedes resided in cantons with a tax index below 100 (56.5% in 1960, 61% in 1970). However, the opposite was the case for the latter period (37.5% in 1980 and 31.5% in 1990). The colours of the cantons differentiate between cantons where foreigners could, and did, use an option of lump-sum taxation of their wealth. The terms for lump-sum taxation were exceptionally favourable for the taxpayer, and thus there is little doubt that this option affected the immigrants’ choice of canton. By this indicator, we find that a majority of Swiss Swedes lived in cantons where this option was in use. We can also note that the lump-sum tax was used in more cantons over time, with a peak in 1980, when just over 80% of the Swedes were settled in lump-sum tax cantons. Moving from the cantonal to the communal (municipalities) level, Maps 6.1 and 6.2 provide interesting visual insights on the settlement choices of the Swedish residents in Switzerland. The map combines two variables: first, the absolute number of Swedish citizens domiciled in each commune is illustrated by the size of the circle; second, the share of Swedes in the total population of each commune is displayed by the colour progression (in red, the communes with a density of Swedes below the national average, in blue those above the national average). For example, the city of Berne hosted an important total number of Swedes (70), but their share compared to the total population (0.048%) was below the national average (0.056%), which is why it is displayed in red.

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Map 6.1 Swedes in Switzerland: communal distribution (1980) (Source Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten)

Based on this data extracted from the 1980 Swiss population census, we find that Swedes were over-represented in some areas, especially in the Lake Geneva area, the Zurich and Zug area, and the Italian-speaking Ticino. The Lake Geneva region (Map 6.2) was densely populated by the Swedish colony, with the cantons Geneva and Vaud hosting almost half (48.7%) of all Swedes in Switzerland in 1980. The La Côte region in particular, located between Geneva and Lausanne, hosted some of the highest densities of Swedes per commune. Dully (3.24%), Vufflens-LeChâteau (2.14%), Lully (1.61%), Mex (1.48%), or Crans-près-Céligny (1%) were all among the top 10 communes in terms of density. These districts are also well known as wealthy communes, housing several luxury residences and exclusive international private boarding schools, such as the Institut Le Rosey in Rolle (Swann 2007; Lillie 2022). Interestingly, if we limit the scope of investigation to the communes hosting more than 20 Swedes (to avoid the bias of very small communes), we also find other municipalities known for their well-off population.

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Map 6.2 Swedes in Lake Geneva Region: communal distribution (1980) (Source Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten)

Oberägeri, Unterägeri, and Zug (Zug), Cologny, Collonges-Bellerive, Chêne-Bougeries (Geneva), Epalinges,7 Lutry, Pully (Vaud), Zollikon, and Küsnacht (Zurich) all figure among the top 20 communes with the largest share of Swedish citizens. In order to examine if the settlement of Swedes in Swiss municipalities was correlated to the level of wealth of the locations, we crossed the demographic data on the Swedish colony presented on the maps above with data on the tax return per capita generated by the municipalities. 7 The founder of IKEA, Ingvar Kamprad (1926–2018), moved to Epalinges on 1 July 1977. Interestingly, his previous official residence was in Denmark (not in Sweden). He left the commune and returned to Sweden on 1 March 2014. His departure, which took place in the middle of a heated political campaign on a federal vote to abolish the preferential tax regime for wealthy foreigners, did not generate a decrease in tax revenues of the commune. On the contrary, Kamprad’s departure was compensated by the arrival of two new foreign lump-sum taxpayers. (Source: Minutes of the conseil communal d’Epalinges, 11.11.2014, Discussion on the 2015 budget, pp. 334–335).

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We used the federal direct tax revenues per capita in 1981–1982.8 We constructed a communal wealth index based on this data. We assume that a high per capita tax revenue of a municipality implies that a large number of wealthy individuals are domiciled in the municipality. Figure 6.3 displays three variables to illustrate the correlation between the settlement choice of the Swedish community in Switzerland and the wealth of municipalities in 1980: (1) the size of the circles indicates the number of Swedes living in a municipality; (2) the vertical axis, on a logarithmic scale, shows the density of Swedes compared to the total population of a municipality; and (3) the horizontal axis, also on a logarithmic scale, offers a reflection of the level of wealth of the municipality based on tax revenues. This means that a municipality with an important share of Swedes and very high tax returns will be displayed in the top right corner of the diagram. The most striking example is the small commune of Dully, on the shores of Lake Geneva, featuring a housing estate made of luxury residences. In 1980, Dully had the highest share of Swedes in its population (3.2%) and also the highest per capita tax revenue, ten times higher than the national average. Overall, Fig. 6.3 clearly indicates, with a large emphasis in the top right section of the diagram, that large colonies of Swedes clustered in municipalities where wealthy individuals were living. One notable exception is the commune of Meyrin in the suburbs of Geneva, which has a low index of wealth (75, national average = 100), but a large number of Swedes. The settlement of Swedes in Meyrin is most probably linked to the closeness of CERN, the European Organization for Nuclear Research established in 1954, which has employed—and continues to employ—an important number of Swedish scientists. The granular data at the municipality level shown in Map 6.1 and Fig. 6.3 confirm that the settlement choice of a community is also connected to the pre-existence of a cohesive cultural colony. In that sense, it should also be highlighted that the Swedish community in Switzerland was consolidated during the 1960s with more institutionalised forms of national grouping and places of sociability. The Swedish Church of Switzerland, based in Geneva, was officially created in 1961 8 Eidg. Steuerverwaltung Steuererträge und Kopfquoten 1981/82. Available online: https://www.estv.admin.ch/dam/estv/fr/dokumente/allgemein/Dokumentation/Zah len_fakten/Steuerstatistiken/direkte_bundessteuer/np_jp_kopfquoten/Steuerertraege% 20und%20Kopfquoten%201981%2082.pdf.download.pdf/81-82_f.pdf.

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Fig. 6.3 Correlation between the density of Swedes and the level of wealth in Swiss municipalities (1980) (Sources Swedish population: Bundesamt für Statistik, Eidg. Volkszählung 1980, Originalstand der Gemeinden und der Staaten. Tax return index: Eidg. Steuerverwaltung Steuererträge und Kopfquoten 1981/82)

and the Svenska Klubben Lausanne-Genève was established in 1962, with the aim of working for the cohesion of Swedes living around Lake Geneva (Svenska Kyrkan i Schweiz. 50 År 1961 - 2011 2011). Swedes as Important Lump-Sum Taxpayers While it is often very difficult to access archival records about lumpsum taxation, which remains a poorly documented tax practice, a 1964 report by the Swiss federal tax administration sheds some light on this phenomenon.9 It gives an account of the existence of 4455 expenditurebased foreign taxpayers in Switzerland, 96% of whom reside in three cantons (Vaud: 63%, Geneva: 24%, and Ticino: 9%). The report further

9 See source of Fig. 6.4.

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gives an approximate estimation (based on a representative sample) of the countries of origin of the taxpayers (Fig. 6.4). According to this data, Swedish citizens were the 7th largest national group of lump-sum taxpayers in 1964, with a share of 5%. This percentage is rather high when the total population of the country and the geographical distance compared to other nations of lump-sum taxpayers are taken into consideration. In 1964, Sweden was ten times less populated than neighbouring Germany (7.6 vs. 74 million inhabitants). Correlating this estimate of 5% with the total number of taxpayers (4455) suggests that roughly 220 Swedish taxpayers’ households in Switzerland were benefiting from a special tax regime for wealthy foreigners in 1964. We can further relate this figure of 220 lump-sum taxpayers households with the total Swedish community in Switzerland. Based on a theoretical linear progression of the decennial census figures, we estimate that there were 2021 Swedish citizens in 1964. To account for the fact that the lumpsum taxpayers’ data (households) does not include the possible spouse and children, we estimate an average of one spouse and one child per household. With this assessment, 220 households represent 660 individuals. Accordingly, we estimate that in 1964 32.7% of the Swedish in

Canada 1%

Other (less than 10) Unknown 10% Denmark 4% Egypt 1%

Greece 2%

Austria 3%

1% France 19%

Belgium Sweden 3% 5% Italy 5%

UK 14% USA 8%

Germany 14%

Netherlands 10%

Fig. 6.4 1964—lump-sum taxpayers established in Switzerland by nationality (Source Swiss federal archives, E6302B#2003/1#530*, Eidgenössische Steuerverwaltung, Bericht über die Veranlagung zur Pauschalsteuer gem. Art. 18 bis WSTB pro 12. Periode [Steuerjahre 1963 und 1964], by Max Hunziker)

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Switzerland had a beneficial tax agreement, and thus had emigrated for tax-related reasons. A preferential tax regime for wealthy foreigners, our data suggest, played an important role in the location choice of tax-driven immigrants. The significance of the Swedish community in Vaud and Geneva is in part connected to the long-standing possibility of opting for expenditurebased taxation.10

The Clustering of Swedes in Switzerland and Their Socio-Economic Background Based on our records of Swedes residing in Switzerland for some years in the 1960s and 1970s, we have been able to map the settlement of Swiss Swedes based on their professional titles (Mr., Dr., Prof., etc.). During the 1970s, the offices of the Swedish Foreign Office in Switzerland were requested to compile lists of all known Swedes living in Switzerland. We cannot with certainty determine if the four local embassy offices used the same criteria when compiling the lists, and whether this may explain the differences in recorded information for each individual. Nevertheless, we believe that the information about titles and workplaces is relevant to help understand the socio-economic profile of the Swedish expats and their settlement choices. The most comprehensive entries on these lists include the full names, professional titles, workplaces, and home addresses of this population. Unfortunately, information about expats’ professional titles is not available for most of the Swedes. Women are in most cases listed without professional or other titles, and workplaces are only recorded for some of the expats. Nevertheless, the material allows us to further explore what may motivate the settlement choices of wealthy emigrants. Here we present some findings of the 1977 data. In this year, the Embassy lists 2674 Swedes living in Switzerland. Of these, 1601 are women, for whom the information is much less detailed than for the men. In most cases, the surnames of the wives are not even mentioned, but simply referred to as ‘Mrs Sven Svensson’, for example. Only 50 women are listed with some 10 Despite the rejection (59.4% of the votes) in a popular vote of a federal initiative to abolish expenditure-based taxation at the national level in 2014, some cantons, namely Zurich (2010), Schauffhausen (2012), Appenzell I.Rh. (2012), Basel-Stadt (2014), and Basel-Land (2014) have decided to abolish it at the cantonal level.

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Table 6.3 Socio-economic profile of Swedes in Switzerland 1977 (per title) (n = 192)

Manager Engineer Nobility Academic Doctor Embassy staff General Director Lawyer Other Total

Berne

Ticino

Vaud

Geneva

Other

Total

6 5 3 2 8 4 1 0 5 34

32 4 2 2 1 0 0 3 9 53

4 1 2 2 1 4 1 2 0 17

17 14 15 11 3 4 7 2 15 88

0 0 1 0 1 0 0 0 1 3

59 24 23 17 14 12 9 7 27 192

Source Swedish Embassy Offices in Switzerland (1977), Förteckning över svenska medborgare, Utrikesdepartementet med föregångare, Turister och utomlands vistande svenskar (utom sjömän), ekonomiskt bistånd, hemsändning, efterforskning, Vol. R20:95, 1975–1981

form of title and/or workplace. Of the 1073 men, the lists state a title and/or workplace for 250 men. Table 6.3 summarises the titles of the 192 Swedes for whom we have this information. The first observation is that these individuals, with just a handful of exceptions, lived in four cantons: Berne, Ticino, Vaud, or Geneva.11 We can also note some differences between these four cantons. Business managers appear to have clustered in Ticino, for example. In Geneva, we find most of the men and women who have a nobility title of some description, and almost all engineers (most worked at CERN, the records show); additionally, most Swedes are listed by an academic title. Berne appears to have been a preferred settlement choice of doctors. Again, we should be careful not to read too much into this information, as we lack data for a large share of the Swedish population. Regarding workplaces, for which we have information for 148 individuals, 71 men and women worked at one of the many international organisations with head offices in Switzerland (especially in Geneva). Forty Swedes worked at CERN, also in Geneva. Based on the 1977 lists, 24% (250 out of 1059) of the male expatriates had a professional or educational title

11 This may be due to the lower quality, in terms of detail, of the lists produced by the Zurich and Basel offices.

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(such as Dir., Prof., Ingenjör, etc.), a sign of belonging to a privileged social class. We have not been able to determine if this percentage is equivalent for the Swedish male population as a whole. The prominent Swedish tax emigrants (Skatteschweizare) also include, besides the already mentioned entrepreneurs Kamprad and Rausing, other professions such as sportsmen (Joakim Bonnier (1930–1972), sportscar racer, or Ingemar Johansson (1932–2009), heavyweight champion), art collector (Theodor Ahrenberg, 1912–1989), film producer (Lars Schmidt, 1917–2009), and businessman (Torsten Kreuger, 1884–1973).

Conclusion In this chapter, we have employed a new database to map the settlement of Swedes in Switzerland between the 1960s and 1980s. The purpose has been to investigate if the settlement choices correspond to the factors emphasised in the literature on the settlement choices of the wealthy. We have investigated if the cantons’ different tax regimes correlated with the settlement of the Swedish expatriates—of which many were wealthy tax emigrants. Our preliminary results indicate that tax-related motivations played a significant role in the settlement choices of wealthy Swedes. They favoured cantons with a low-tax burden, or (and sometimes both) cantons who offered preferential tax regimes for wealthy foreigners. Our investigation suggests that 29% of Swedish emigration to Switzerland in the 1970s was connected to tax reasons (crossing demographic data with Lindkvist), and that 32.7% of the 1964 emigration was connected to tax reasons (crossing demographic data with lump-sum data). This tax-driven emigration was one example—the legal relocation of the tax domicile of individuals—of a wider phenomenon. Indeed, as we explored in another paper, the period from the late 1960s to the 1980s was marked by a development of legal and illegal capital flight and tax evasion from Sweden to Switzerland (Giddey and Wendschlag 2022). During this period, Switzerland was a popular destination for many rich and famous people from other countries. Except for the low taxes, Switzerland also offered other benefits, such as a higher emphasis on privacy and a greater acceptance of wealthy people and displays of opulence. We have argued that the differences were big between Sweden and Switzerland in both these regards, and we believe that our investigation fits well with the previous research. We have found that wealthy Swedes clustered in a limited number of cantons and municipalities, and

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we interpret this as support for literature that emphasises the value that the wealthy put on living close to other wealthy people. If the tax rate alone determined the settlement choices, the wealthy Swedes could have settled in many different cantons, but they appear to have preferred to live in the same cantons and municipalities as other wealthy Swedes. Due to data constraints, we have not been able to investigate to what degree the Swedish expatriates’ settlement choices can be explained by their workplace. Records of Swedish multinational companies’ subsidiaries in Switzerland have not been available. Overall, we can note that large contingents of all Swedes in Switzerland lived in the largest urban centres, of which Geneva, where some of our Swedes worked, is also an important hub for international organisations. Further studies could explore the importance of these workplaces in explaining the settlement. To conclude, our findings suggest that the settlement choices of tax emigrants can be explained by both tax rates and a desire to live close to other wealthy people, while much of the previous research has tended to focus on only one of these factors. To further advance our understanding of what drives the settlement of the wealthy, we argue for both of these factors to be considered, rather than pitting one explanation against the other. Acknowledgment We would like to thank Hadrien Buclin and Sébastien Guex for their valuable feedback, as well as Martin Grandjean for his substantial help with the maps and correlation chart visualisations.

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ed. Alexander Nützenadel, Marc Buggeln, and Martin Daunton, 83–104. Cambridge: Cambridge University Press. https://doi.org/10.1017/978131 6498958.004. Kleven, Henrik Jacobsen, Camille Landais, and Emmanuel Saez. 2013. Taxation and International Migration of Superstars: Evidence from the European Football Market. American Economic Review 103 (5): 1892–1924. https://doi. org/10.1257/aer.103.5.1892. Kleven, Henrik Jacobsen, Camille Landais, Emmanuel Saez, and Esben Schultz. 2014. Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners’ Tax Scheme in Denmark. The Quarterly Journal of Economics 129 (1): 333–378. https://doi.org/10.1093/qje/qjt033. Kleven, Henrik Jacobsen, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva. 2020. Taxation and Migration: Evidence and Policy Implications. Journal of Economic Perspectives 34 (2): 119–142. https://doi.org/10.1257/ jep.34.2.119. Lantz, Gunnar. 2021. Letting the Masses Pay for the Welfare State: Tax Regressivity in Postwar Sweden. European Review of Economic History 25 (1): 160–179. https://doi.org/10.1093/ereh/heaa007. Lillie, Karen. 2022. Adaptations to Global Changes: Strategic Evolutions of an Elite School, 1961–2011. History of Education 51 (2): 1–18. https://doi. org/10.1080/0046760X.2021.2002433. Lindkvist, Hans. 1990. Kapitalemigration. Stockholm: Ekonomiska forskningsinstitutet vid Handelshögsk (EFI). Longchamp, Olivier. 2014. La politique financière fédérale (1945–1958). Lausanne: Antipodes. Lüthi, Carol Gregor. 2017. Lump-Sum Taxation in Switzerland: A Systematic Classification into Swiss Tax Law with Current References. Norderstedt: Books on Demand. Mahnig, Hans, and Sandro Cattacin, eds. 2005. Histoire de la politique de migration, d’asile et d’intégration en Suisse depuis 1948. Sozialer Zusammenhalt und kultureller Pluralismus = Cohesion sociale et pluralisme culturel = Social cohesion and cultural pluralism. Zurich: Seismo. Ogle, Vanessa. 2017. Archipelago Capitalism: Tax Havens, Offshore Money, and the State, 1950s–1970s. The American Historical Review 122 (5): 1431–1458. https://doi.org/10.1093/ahr/122.5.1431. Oscarsson, Henrik. 2016. Utlandröstande. In Svenska Utlandsröster SOMUndersökningen till Utlandssvenskar 2014 SOM-Rapport Nr 65, ed. Maria Solevid (SOM-institutet), 259–85. Piketty, Thomas, and Emmanuel Saez. 2007. How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective. Journal of Economic Perspectives 21 (1): 3–24. https://doi.org/10.1257/jep.21.1.3.

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Sanandaji, Tino. 2014. The International Mobility of Billionaires. Small Business Economics 42 (2): 329–338. https://doi.org/10.1007/s11187-013-9481-0. Schmidheiny, Kurt. 2017. Emerging Lessons from Half a Century of Fiscal Federalism in Switzerland. Swiss Journal of Economics and Statistics 153 (2): 73–101. https://doi.org/10.1007/BF03399435. Schmidheiny, Kurt, and Michaela Slotwinski. 2018. Tax-Induced Mobility: Evidence from a Foreigners’ Tax Scheme in Switzerland. Journal of Public Economics 167 (November): 293–324. https://doi.org/10.1016/j.jpubeco. 2018.04.002. Slemrod, Joel, and Shlomo Yitzhaki. 2002. Tax Avoidance, Evasion, and Administration. In Handbook of Public Economics, ed. Alan J. Auerbach and Martin Feldstein, 3: 1423–1470. Elsevier. https://doi.org/10.1016/S15734420(02)80026-X. Strehle, Res. 2020. Operation Crypto: Die Schweiz im Dienst von CIA und BND, 1st ed. Basel: Echtzeit Verlag. Svenska Kyrkan i Schweiz. 50 År 1961 - 2011. 2011. https://docplayer.se/403 73760-Svenska-kyrkan-i-schweiz-50-ar-en-historisk-kavalkad-i-tre-delar-de-for sta-20-aren-skut-tar-over-och-2000-talet.html. Swann, Michelle. 2007. Promoting the “Classroom and Playground of Europe”: Swiss Private School Prospectuses and Education-Focused Tourism Guides, 1890–1945. University of British Columbia. https://doi.org/10.14288/1. 0055448. Tanner, Jakob. 2020. Sweden – Switzerland: The Entangled History of Two like-Minded Countries. https://doi.org/10.5167/UZH-194558. Vogel, Joachim. 1974. Taxation and Public Opinion in Sweden: An Interpretation of Recent Survey Data. National Tax Journal 27 (4): 499–513. Young, Cristobal. 2017. The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich. Studies in Social Inequality. Redwood City: Stanford University Press. Young, Cristobal, Charles Varner, Ithai Z. Lurie, and Richard Prisinzano. 2016. Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data. American Sociological Review 81 (3): 421–446. https://doi.org/10. 1177/0003122416639625.

CHAPTER 7

The Rise of Tax Havens and Conduit Countries from the Early 2000s Arjan Lejour

One of the oldest examples of a tax haven is Switzerland, which was so classed even before the First World War (Guex 2021). Since that time, more and more countries have been labelled as tax havens because it is possible to hide (or to store if you prefer) personal wealth in these countries. Zucman (2015) estimates that about 7800 billion US dollars is hidden in tax havens, totalling 8% of all financial wealth. The role of tax havens in corporate income tax avoidance is more recent. In academic literature, Hines and Rice (1994) were the first to

This chapter was written for the conference Tax Evasion or Avoidance and Tax Havens, from the Nineteenth Century to the Present Day, University of Lausanne (online conference), Switzerland, June 24–25, 2021. I thank the editors and the participants for their comments and suggestions. A. Lejour (B) Tilburg University, Tilburg, The Netherlands e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_7

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quantitatively assess the role of tax havens by measuring the size of the overseas profits of American multinationals. These authors also identified countries as tax havens, and since then, various tax havens lists have been published. The emerging literature on tax havens focuses on the motives of countries to become either a tax haven or a conduit (Mintz 2004; Dharmapala and Hines 2009), the role of tax havens in corporate tax avoidance (Hines 2010; Zucman 2014), and the effects on global and national welfare (Suarez Serrato 2019; Dharmapala 2020). Another strand of the literature discusses the policies that are available to combat the use of tax havens. Examples of these include the effectiveness of information exchange agreements (Kemne et al. 2017), the effects of the common reporting standard (Casi et al. 2020), and the proposal for worldwide property registers (Zucman 2015). In this chapter I focus on the development of corporate tax havens in the first two decades of the twenty-first century. There are three reasons to do so. First, the academic literature and media stories suggest that corporate income tax avoidance has become more important in recent decades, and I want to verify whether this is indeed the case. The second reason is that I want to illustrate this possible development with data, and most of these data are not available for earlier years. Third, nowadays there is an intense debate on measures against corporate income tax avoidance. The developments identified in this chapter could be useful factual information, assisting in this debate. The main question is whether the role of corporate tax havens has increased recently. Lane and Milesi-Ferretti (2018) conclude that the role of offshore financial centres (OFCs) in the network of international portfolio flows has become larger. OFCs are quite often tax havens, but the larger OFCs, like Hong Kong, Luxembourg, and Singapore, are not traditional small island economies. These are larger economies and are well-integrated into the world economy. Due to the heterogeneity of OFCs and tax havens, it makes sense to discriminate between both groups. Following my earlier research (Lejour 2021) I distinguish between traditional tax havens and conduit countries. Conduit countries facilitate the passthrough of financial flows composed of foreign direct investment in one direction and the taxable returns on these investments in the other direction. Multinationals often motivate

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40 35 30 25 20 15 10 5 0 Tax havens

6 conduits

9 conduits 2000

21 Dev countries

109 countries

2020

Fig. 7.1 Average statutory tax rates for selected country groups in 2000 and 2020 (Source OECD tax database. Averages are unweighted)

this passthrough by the tax savings they can obtain.1 Section “Characteristics of Corporate Tax Havens and Conduit Countries” provides more details on the different characteristics. In answering the main research question, I check the development of corporate income taxes over time. Statutory tax rates have decreased by about eight percentage points between 2000 and 2020. This figure is an average of the rates of 109 countries, as can be seen in Fig. 7.1. However, there are no systematic differences between developed countries, conduit countries, and tax havens. Withholding taxes has been barely reduced at the national level, but in some new bilateral tax treaties, countries have agreed on lower tax rates. On the other hand, more countries have implemented controlled foreign company (CFC) rules such that the profits of a multinational in low-tax countries can be taxed in the residence country. Taking all these developments together, the tax burden on incoming and outgoing dividends decreased somewhat between 2009 and 2017, but this decrease is not substantive (Lejour et al. 2021). I identify other different developments that affect the attractiveness of tax havens. First, various large countries have changed their corporate 1 Bolwijn et al. (2018), Garcia-Bernardo et al. (2017), and Van ‘t Riet and Lejour (2018) have recently identified the most important conduit countries. These are countries with high, relatively large inward and outward foreign direct investment (FDI) positions compared to GDP. IMF and the United Nations Conference on Trade and Development (UNCTAD) also label most of these countries as investment hubs.

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income tax system from a residential to a territorial system. Examples of these are Japan, the UK, and the US. In a territorial system it is more beneficial for multinationals to locate profits in low-tax countries. This development could stimulate corporate tax avoidance. Second, tax havens seem to cooperate better when information requests are made by other countries for taxpayer information. Many information exchange agreements have been negotiated. Also, bank secrecy rules have been lifted in various countries, quite often because of outside pressure. These developments could reduce the attractiveness of tax havens. On the other hand, globalisation and digitalisation facilitate the shifting of profits to tax havens. Due to digitalisation, the link between production and location is less identifiable/visible. The proof of the pudding is in the eating. Ideally, one would analyse taxable international income flows. There are global databases containing information on the international renumerations for intellectual property rights between countries, but not for international dividend and interest flows. However, dividends and interest are the renumerations of invested equity and debt, that is to say foreign direct investment (FDI). Because it is reasonable to assume that the size of FDI and their returns are positively correlated, I track the international FDI positions over time as proxy for intrafirm dividends and interest. FDI has grown much faster than GDP, and the role of conduit countries and tax havens in these FDI positions has increased. This points to a more extended use of tax planning strategies by multinationals through the international restructuring of FDI flows. This confirms the conclusions of Lane and Milesi-Ferreti (2018) on portfolio flows. Although we miss some direct indicators to conclude whether instances of corporate income tax avoidance have risen through the increased use of tax havens, the available indicators point to this being indeed the case. This does not imply that existing anti-tax avoidance measures are ineffective. We must be aware that many proposed measures in the base erosion and profit shifting (BEPS) reports have only been implemented recently in law. In the autumn of 2021, 137 members of the OECD and the Inclusive Framework agreed on a minimum tax of 15% on profits in every country, and to allocate a share of the excessive profits of big multinationals to market jurisdictions (OECD 2021). Even many tax havens have agreed on these outcomes, although some of them only agreed after certain concessions. This could have a substantial impact on the position of various tax havens in the global network of international financial flows, and could

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reduce their role in corporate income tax avoidance. The impact will also depend on the non-tax characteristics that make countries attractive as tax havens. Section “Characteristics of Corporate Tax Havens and Conduit Countries” presents the different characteristics of tax havens and conduit countries. Section “Recent Developments” identifies the development of tax policies over the last two decades. Because these outcomes are inconclusive with respect to the role of tax havens and conduit countries, Section “The Proof of the Pudding is in the Eating Conclusions ” tracks the development of international capital flows. Section “Conclusions” concludes and discusses various policy options.

Characteristics of Corporate Tax Havens and Conduit Countries The phrase tax haven covers various notions, and various classifications of tax havens (Palan et al. 2010). Despite these differences, three characteristics seem to stand out (OECD 1998). First, the jurisdiction levies no, or effectively low, taxes on income. A high or normal statutory rate is of little consequence when the tax code contains all sorts of tax-reducing exceptions. Second, the tax code of the jurisdiction may lack transparency, or could even guarantee secrecy of the ultimate owner. Third, the jurisdiction is normally not cooperative in supplying information on foreign taxpayers, even at the request of other tax authorities. Consequently, individuals and firms may deliberately keep income and wealth hidden in these jurisdictions. The academic literature is quite pragmatic in using definitions and country lists of tax havens (Dharmapala 2020). Most lists are based on the original list of Hines and Rice (1994) and its update in the work of Dharmapala and Hines (2009).2 From the US statistics, it appears that American multinationals have large overseas profits in Bermuda, Caribbean tax havens (including the British Virgin Islands and the Cayman Islands), Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. This is an argument to classify these countries as the largest

2 See also the overview of Gravelle (2015).

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tax havens in this literature. These countries are also often labelled as offshore financial centres (Lane and Milesi-Ferretti 2018).3 Some of the largest OFCs, such as Ireland, Luxembourg, the Netherlands, and Switzerland, have higher corporate income tax rates than those of typical low-tax jurisdictions, but are characterised so because of the large financial flows passing through their jurisdictions. The large OFCs also differ from traditional tax havens because the latter are often small and do not have diversified economies. Being a tax haven is thus a way to develop an economy with a large financial sector (Dharmapala and Hines 2009). Lejour (2021) labels these large OFCs as conduit countries, based on earlier literature. Garcia-Bernardo et al. (2017) define conduit OFCs as countries that facilitate the movement of capital between other OFCs and other countries. Using firm-level data, Garcia-Bernardo et al. (2017) classify Ireland, the Netherlands, Singapore, Switzerland, and the UK as conduit OFCs. Using a less strict definition, Cyprus, Hong Kong, and Luxembourg also fall into this category. Van ‘t Riet and Lejour (2018) classify the UK, Luxembourg, and the Netherlands as the most important conduit countries in a network analysis of international corporate taxation. It is important to distinguish conduit countries from traditional tax havens, because the jurisdictions in both groups have different economic, institutional, and tax characteristics. Due to these differences, anti-BEPS measures also have to be different. Section “Conclusions” discusses this in more detail. This does not imply that conduit countries should not be labelled as tax havens, but that we should be aware of the differences. In this paper I follow my earlier classifications (Lejour 2021). The strictest one consists of Hong Kong, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland as conduit countries. A less strict definition also includes Cyprus, Malta, and the UK.4

3 See Blouin and Robinson (2019), Clausing (2016), Dharmapala (2020), Tørsløv et al. (2020), and Zucman (2014). 4 Lejour (2021) also defines a broader category that includes Austria, Belgium, and Hungary. However, this has hardly any impact on the outcomes compared to the less strict definition, and will be ignored here.

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As tax havens, conduit countries have highly developed legal systems that facilitate the needs of multinational corporations (Mintz 2004; Garcia-Bernardo et al. 2017). Sometimes these countries also have bank secrecy rules, like Switzerland. Different from traditional tax havens, conduits play a key role in the global corporate ownership network by allowing the transfer of capital without taxation (Garcia-Bernardo et al. 2017). According to Mintz (2004), these countries have equally large incoming and outgoing FDI flows. International FDI statistics show that to be indeed the case.

Recent Developments This section analyses whether ‘tax haven’ characteristics have changed over time. Because I answer this question quantitatively, the period is limited to the years 2000 to 2020. The reason for this is that much more data have become available in this period. Moreover, this also seems the age when corporate tax avoidance has increased a lot. Still, it is hard to compare some of the tax haven characteristics mentioned in Sect. 7.2 over this period. Recently, Tax Justice (2019) has developed a corporate tax haven indicator, but this exists only for 2019 and 2021. It has also constructed a financial secrecy indicator. This indicator has existed since 2009, and Tax Justice has recently noted that this indicator shows big reforms in automatic exchange of information and beneficial ownership registration, but not in country-by-country reporting in 2020. Since the OECD (1998) publication about harmful tax practices, various policy initiatives have been undertaken to stimulate the cooperative behaviour of tax havens. One is the promotion of bilateral exchange treaties (TIEAs) between developed countries and tax havens. In these treaties, arrangements are made for a cooperative exchange of taxpayer information. If tax havens sign a certain number of treaties, these jurisdictions would be removed from a blacklist. Hundreds of these TIEAs have been signed. Although these treaties seem to have had some effect, secrecy and uncooperative behaviour of tax havens are mainly relevant in regard to private wealth and tax evasion, and less so for corporate tax avoidance (Dharmapala 2020). To a large extent, the tax burden determines the degree of corporate income tax avoidance. I try to measure this in various ways. I start with the development of statutory tax rates. Figure 7.1 shows that all country

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groups show a clear decline in their statutory tax rates between 2000 and 2020. For the whole group of 109 countries this decline is 7.5 percentage points, the same as for the group of conduit countries. For 21 developed countries it is somewhat larger, 10.1 percentage points, and for the group of tax havens it is 9.2 percentage points. All averages are unweighted. Although at the country level the reduction of the tax rates could be larger or smaller, for the country groups I do not notice any systematic differences. I cannot conclude that tax havens and conduit countries have become more attractive based on the development of statutory corporate income tax rates. Ideally, I want to analyse the development of effective tax rates. With the emergence of country-by-country reporting data on profits and paid taxes by country, we could expect that time series of these tax rates will be developed in the coming years. However, data have been gathered from 2016, and many of these data are not public, although they are not anonymous. So far, we only have data from 2015 to 2018, calculated by Tørsløv et al. (2020), using macroeconomic and balance of payments data. The effective rates over these few years vary substantially at the country level, but I do not find a clear pattern, including for the country groups. Van ‘t Riet and Lejour (2018) have gathered details of the corporate and dividend tax systems of about one hundred countries, covering more than 95% of World GDP in 2013. Later, they have also gathered these data for 2009 and 2017. Although this is not a very long period, the outcomes in Table 7.1 show a clear pattern. Moreover, some of their indicators are quite rough, ignoring details on tax treaties, CFC rules, and double tax relief methods. Having these caveats in mind, the use of more generous exemption methods for double taxation have increased somewhat between 2009 and 2017, suggesting less taxation in the residence country. This corresponds to the move towards territorial tax systems, as Japan, the UK, and the US have done. In these eight years, about 10 countries implemented CFC rules, such that profit income in low-tax countries would be taxed more often. Many other countries have also implemented stricter CFC rules (Dharmapala 2020), but this is not reflected in the CFC dummy in Table 7.1. Third, the average number of double tax treaties within the group of 108 countries has increased, with two treaties on average. More treaties suggest lower bilateral withholding taxes, but this outcome does not materialise in the average bilateral withholding tax on dividends. It remains constant and is about six percentage points lower than

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Table 7.1 Changes in tax characteristics between 2009 and 2017 (averages for 108 countries)

Double tax relief method CFC-rule dummy Standard dividend tax Number of double tax treaties Bilateral dividend tax CIT rate Average tax on outgoing dividend Average tax on incoming dividend

2007

2013

2017

3.17 0.27 12.8% 31.4 6.9% 23.5% 13.3% 17.2%

3.22 0.31 12.7% 31.8 6.9% 22.4% 13.1% 16.6%

3.29 0.37 12.7% 33.2 6.9% 22.1% 12.8% 15.9%

Notes All numbers are unweighted averages over 108 countries used by Van ‘t Riet and Lejour (2018). This publication specifies the definitions and data sources of the variables. Double tax relief methods are categorised: a 4 indicates exemption, 3 tax credit, 2 deductions, and 0 no relief at all. The CFC dummy is 1, as there is a CFC rule (irrespective of its strength) and 0 otherwise. The number of double tax treaties reflects the number of treaties with the other 107 countries in the sample

the standard withholding tax rate. The sixth row in Table 7.1 confirms the decrease in statutory corporate income tax (CIT) rates. This is less pronounced than in Fig. 7.1, because the main decrease took place before the economic crisis of 2009. As a result of all these changes in corporate income tax laws over time, the combined tax of dividend and corporate income on outgoing dividends decreases from 13.3 to 12.8%, and decreases by 1.3 percentage points on incoming dividends between 2009 and 2017. These are modest decreases in the taxation of international dividend income, but not negligible.

The Proof of the Pudding Is in the Eating Tax havens have become more transparent and more cooperative in exchanging information over time. Although this development is probably more important in regard to storing private wealth, one could expect that tax havens are also less used by multinational firms for corporate tax avoidance. This would result in less income flows (dividend, interest, and royalties) to and from these countries, and correspondingly less direct foreign investment. I will check the development of these investment

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flows mainly by analysing FDI positions. Thereafter I will use statistics on international charges for intellectual property rights in order to highlight the development of international royalty flows. I start with the FDI positions, including special purpose entities (SPEs) from the IMF CDIS database.5 Figure 7.2 presents the results for the twenty largest positions. It might be expected that the US, as the biggest economy in the world, has the largest outward investment positions. What is surprising are the large positions of the Netherlands, Luxembourg, Hong Kong, Switzerland, and British Virgin Islands, which all feature in the top 10. Compared to GDP, the results are even more astonishing. Lejour (2021) estimates that the global ratio of FDI positions to GDP is 41%. For Luxembourg, the British Virgin Islands, Bermuda, the Cayman Islands, and Jersey it is even more than 1000%. These large ratios imply that the amount of FDI cannot be absorbed in the economies of these tax havens and are passed through these countries. A comparison of outward and inward FDI positions suggests that to be indeed the case.6 Between 2009 and 2019 the ratio of global FDI positions to global GDP increased from 34 to 42%. This increase probably reflects further globalisation developments, but it could also point to increasing international tax avoidance. Figure 7.3 shows that the positions of tax havens and conduit countries increased over time (except in the UK) as a share of the total FDI stock. The British Virgin Islands and the Cayman Islands have become more important, and this is also the case for the conduit countries of Hong Kong, Ireland, and Singapore. This shift suggests a further restructuring of foreign direct investment and investment income flows to low-tax countries. Lane and Milesi-Ferretti (2018) point to a similar development with respect to portfolio investment. The IMF statistics are based on the national accounts of their members. So, if the investment of a US multinational in Germany is structured via the Netherlands, it is reported as outward investment in the US and in the Netherlands, and as inward investment in the Netherlands and in Germany. Damgaard et al. (2019) label this as phantom investment. They 5 I analyse here the outward positions. The tables of top 20 countries with outward and inward positions show only minor differences between both positions (Lejour 2021). 6 Lejour et al. (2021) use firm-level data of SPEs in the Netherlands and conclude that large dividends and interest are royalty flows that pass these SPEs from one country to another.

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Hong Kong

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4500 4000 3500 3000 2500 2000 1500 1000 500 Jersey

Austria

Sweden

Italy

Spain

China

Singapore

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Canada

Cayman Islands

Bermuda

Ireland

France

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Germany

United Kingdom

United States

Netherlands, The

0

Fig. 7.2 The size of outward FDI positions in 2018 (billion US dollars) (Source IMF CDIS database) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 21 Tax havens

All tax havens

6 Conduit countries 2009

9 Conduit countries

21 All developed Developed countries countries

2019

Fig. 7.3 The shares of country groups in foreign direct investment positions, 2009 and 2019 (Source IMF CDIS database)

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conclude that about 38% of global FDI is phantom (or double counted) in 2017, rising from 30% in 2009. This estimate shows that a large share of the rise in FDI in the last decade is not real, but phantom FDI. Comparing the numbers of Damgaard et al. (2019) to the self-reported numbers of Luxembourg and the Netherlands on SPE shares suggests that the percentage of 38% phantom FDI in 2017 is probably even a lower bound. Bolwijn et al. (2018) conclude that half to even two-thirds of the global FDI stock is related to conduit countries and tax havens. This is not all double counted, but for a large share it will be the case. As regards what the exact number might be, the numbers show that conduit countries and several tax havens play a crucial role in the global FDI network, and that this role has increased over the last decade. A related fact is the rise of international payments for the use of intellectual property (IP) rights. The numbers in Fig. 7.4 include intra and interfirm payments and receipts, aggregated over all countries. Intrafirm payments could indicate tax avoidance because intellectual property rights are shifted to low-tax countries. Figure 7.4 shows that these payments have increased substantially in recent decades, by about 10% per year on average. Only in 2020 the numbers did not rise, which could imply that this trend has come to an end, at least temporarily. The annual increases in these payments outpaced the annual increases in global GDP by far. This is closely related to the rise of the big tech firms, with all their intangibles, and the digitalisation of the economy, and we know that many of these big tech firms have located their IP rights in tax havens. There is also other evidence that points towards increased corporate income tax avoidance. Profit shifting has become more sensitive to differences in corporate tax rates. Beer et al. (2020) suggest that, on average, a one percentage point lower corporate tax rate will raise before-tax profit income by 1%, based on a meta-analysis of the empirical literature on profit shifting. They also conclude that this elasticity has increased over time: from 0.60 in 1990 to 1.5 in 2015. Although these calculations are mechanically derived by adding the coefficient of the year times the number of years to the overall elasticity, it still suggests a substantial increase. In recent decades, international capital flows seem to have been more and more structured, in such a way that corporate income taxes could be avoided to some extent. This raises the net profits of multinationals, but national governments lose tax revenues. These are serious amounts. The

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Charges for the use of intellectual property, payments (BoP, current US$) Charges for the use of intellectual property, receipts (BoP, current US$)

Fig. 7.4 International payments for the use of intellectual property (IP) rights (Source World Development Indicators from the World Bank)

estimates on the global revenue losses of corporate tax income avoidance range from 50 to 280 billion US dollars each year. 150 billion is about the average of these estimates (Lejour 2021). These estimates are mainly based on quantifying the missed corporate tax revenues from two tax avoidance mechanisms: transfer pricing and debt shifting. These are not the only strategies used to avoid corporate taxation (Beer et al. 2020). Lejour (2021) also adds the tax revenues losses due to treaty shopping, which avoids paying withholding taxes. Then the total revenue losses amount to 188 billion US dollars. The large, developed countries are the main losers in absolute terms. Taking account of both their large share in the world economy of 64% and the average CIT rate, these countries seem to lose about 138 billion dollars (see Column (3) of Table 7.2). The main loser is the US, which is also confirmed by other studies (Clausing 2016; Tørsløv et al. 2020). The possible revenue losses for tax havens are negligible. Columns (4) to (7) of Table 7.2 try to estimate the role of tax havens and conduit countries in treaty shopping and profit shifting (transfer pricing and debt shifting). Treaty shopping is closely related to the FDI positions of special purpose entities (SPEs). These holdings are mainly established to enable

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the passthrough of financial flows, and are most prevalent in conduit countries, and thus these countries are mostly involved in treaty shopping. However, treaty shopping also occurs between other developed countries. The developed countries and tax havens are more involved in other profit shifting techniques. In conclusion, a large share of profit shifting revenue losses can be linked to conduit countries, but to other developed countries as well. Tørsløv et al. (2020) calculate the missing profits and the corresponding corporate tax revenues by country for 2015. They mainly use national accounts, foreign affiliate statistics, and balance of payments data to estimate profit shifting for about 80 countries in the world, covering more than 90% of GDP. Tørsløv et al. (2021) compare the outcomes from 2015 to 2018. According to their figures, corporate profit shifting increased from about 616 to 946 billion dollars in 2018. 36% of all foreign profits is in tax havens, mainly from royalty payments, management fees, and interest payments. According to Fig. 7.4, international royalty payments have indeed increased by 50 billion US dollars in these three years. The tax revenue losses also increased, but are still about 9% of total corporate income tax revenues. These outcomes suggest that the amount of profit shifting and tax avoidance has increased between 2015 and 2018. To a large extent this is due to the rising profitability of multinationals in these years. The share of shifted foreign profits has hardly increased. From this perspective, the Table 7.2 Impact of tax havens and conduit countries on tax avoidance

Column Allocation Unit 21 tax havens 6 conduits 9 conduits 21 developed

GDP

CIT rate

National revenue loss

FDI-SPE stock

Treaty shopping

FDI non-SPE stock

Profit shifting

(1)

(2)

(4)

% 8.48

% 5.46

(5) (4)*38 Bln $ 2.08

(6)

% 0.30

(3) (1)*(2)2 188 Bln $ 0.20

% 11.04

(7) (6)*150 Bln $ 16.56

3.33 6.76 64.39

20.22 21.31 25.92

2.80 6.34 138.41

48.39 57.07 25.27

18.39 21.69 9.60

18.94 31.75 39.51

28.41 47.62 59.27

Source Lejour (2021)

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effects of corporate tax avoidance strategies seem not to have accelerated over the last few years.

Conclusions Despite a rising awareness by the public and policy makers on corporate income tax avoidance strategies, the role of tax havens and conduit countries seems to have increased over recent decades, at least as measured by their share in global FDI positions. Lane and Milesi-Ferretti (2018) conclude that this is also the case for portfolio investment, and the steep rise of international payments on intellectual property rights points in the same direction. Damgaard et al. (2019) conclude that the double counting of FDI positions is increasing, suggesting that FDI passes through, on average, more (conduit) countries before it is finally invested in the host country. Although statutory tax rates have been lowered substantially since 2000 and bilateral withholding taxes have decreased somewhat, the lower tax rates and the changes in other tax rules do not seem to be the main drivers for the larger role of tax havens in the world economy. This role has probably been increased by the further rise of globalisation and digitalisation, making it easier to shift profits between countries. In particular, the new and large tech companies seem to use quite aggressive tax planning strategies. These multinationals earn large monopoly profits, and a large part of these profits is shifted to tax havens. Dharmapala (2020) concludes that more countries have used CFC rules and thin capitalisation rules over recent decades, and illustrates that these anti-tax avoidance rules are to some extent effective. However, the effects seem to be meagre from a global perspective. There are various reasons for this. First, many countries still do not use CFC rules or have relatively lax rules. Second, CFC rules are mainly directed towards traditional tax havens and not to conduit countries, because the latter have relatively high statutory CIT rates. These conduit countries are the ones that play a major role in the structuring of international capital flows. In recent years, countries have implemented more anti-BEPS measures following the BEPS-action points from 2015 (OECD 2015). One example is the anti-tax avoidance directive of the EU. This is an earning stripping measure, such that the deduction of interest costs from firm profits is limited. Also, the anti-abuse measures in double tax treaties are strengthened by principal purpose tests and the multilateral instrument.

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However, it is still too early to conclude whether these measures are effective, because they have only recently been implemented, and the relevant data only became public after a few years. Even if these measures are effective, they will not eliminate corporate tax avoidance, probably not even reduce it to a large extent. This suggests that new measures are necessary, such as the minimum taxation proposed in the BEPS 2.0 negotiations. This measure could be powerful, because it also includes a mechanism whereby other countries can tax profits in low-tax countries. That should guarantee a minimum level of corporate income taxation worldwide, even if not all tax havens will levy a corporate income tax themselves. Although international cooperation is the preferred option, countries could also take more stringent measures themselves. The question is whether countries have the incentive to do so. Dharmapala (2020) signals a collective action problem for imposing national anti-BEPS measures, and notices that certain countries benefit from tax havens such that they are not always willing to implement these measures. A lower corporate tax burden for multinational firms could stimulate investment and even employment at home. Suarez Serrato (2019) shows that measures against the use of Puerto Rico as a tax haven reduced the investment and employment of multinationals in the US. If countries take unilateral actions, one could think of a stricter use of participation exemption and stricter CFC rules, minimum rates on withholding taxes (dividend, interest, royalties), and a stricter limitation of benefits in tax treaties. Countries should target their measures to conduit countries, because their role in restructuring international financial flows is still increasing. Another road is more transparency. The publication of country-bycountry reporting of profits and tax payments should be stimulated further, so that it becomes clear where multinationals earn their income, and what amount of taxes they pay in these countries. An increasing number of multinationals publish these data already, but many still have not. More public information on tax planning strategies could also help, such that public opinion could steer multinationals towards less aggressive tax planning strategies.

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Bibliography Beer, S., R. de Mooij, and L. Liu. 2020. International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots. Journal of Economic Surveys 34 (3): 660–688. https://doi.org/10.1111/joes.12305. Blouin, J., and L. Robinson. 2019. Double Counting Accounting: How Much Profit of Multinational Enterprises Is Really in Tax Havens? https://papers. ssrn.com/sol3/papers.cfm?abstract_id=3491451. Bolwijn, R., B. Casella, and D. Rigo. 2018. An FDI-Driven Approach to Measure the Scale and Economic Impact of BEPS. Transnational Corporations 25 (2): 107–143. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3422774. Casi, E., C. Spengel, and B. Stage. 2020. Cross-Border Tax Evasion After the Common Reporting Standard: Game Over? Journal of Public Economics 190. https://doi.org/10.1016/j.jpubeco.2020.104240. Clausing, K.A. 2016. The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond. National Tax Journal 69 (4): 905–934. https://doi.org/10.17310/ntj.2016.4.09. Damgaard, J., T. Elkjaer, and N. Johannesen. 2019. What Is Real and What Is Not in the Global FDI Network? IMF Working Paper WP/274/19, December 2019. https://www.imf.org/external/pubs/ft/fandd/2019/09/ the-rise-of-phantom-FDI-in-tax-havens-damgaard.htm. Dharmapala, D. 2020. Do Multinational Firms Use Tax Havens to the Detriment of Other Countries? CESifo Working Paper No. 8275. https://www.cesifo. org/DocDL/cesifo1_wp8275.pdf. Dharmapala, D., and J.R. Hines. 2009. Which Countries Become Tax Havens? Journal of Public Economics 93: 1058–1068. https://doi.org/10.1016/j.jpu beco.2009.07.005. Garcia-Bernardo, J., J. Fichtner, F. Takes, and E. Heemskerk. 2017. Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network. Nature Scientific Reports 7 (1): 6246. https://doi.org/ 10.1038/s41598-017-06322-9. Gravelle, J. 2015. Tax Havens: International Tax Avoidance and Evasion. Congressional Research Service, January 15. https://fas.org/sgp/crs/misc/ R40623.pdf. Guex, S. 2021. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review 95: 1–20. https://doi.org/10.1017/S0007680520000914. Hines, J.R. 2010. Treasure Islands. Journal of Economic Perspectives 24 (4): 103– 126. https://doi.org/10.1257/jep.24.4.103. Hines, J.R., and E. Rice. 1994. Fiscal Paradise: Foreign Tax Havens and American Business. Quarterly Journal of Economics 109 (1): 149–182.

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CHAPTER 8

Luxury Free Ports as Purpose-Built Conduits for Tax Evasion, 1990–2020 Chloe Fyfe

In the offshore paradigm, Luxury Free Ports—a term popularised by Oddny Helgadottir (2020)—have emerged as a new form of tax haven, and as a mutation of their traditional predecessors. In the last two decades, the development of specially designated zones across the globe has led to concern and scepticism over the free port mechanism and its evolving role in wealth management and “assetization”1 (Birch and Muniesa 2020) within the art market. Free ports have a long and complex history, but the Luxury Free Port marks a departure from its namesake. Introducing the case study of Geneva Free Port, this paper seeks to understand the divarication of traditional free ports—originally intended to drive connectivity and innovation, and the development of luxury 1 The concept of turning anything that can be controlled, traded, and capitalised, into an asset.

C. Fyfe (B) University of Glasgow, Glasgow, Scotland e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_8

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free ports—known to hoard assets and obscure wealth. While proposing that contemporary luxury ports are indeed purpose-built conduits for tax avoidance and evasion, it is critical to observe that this mechanism developed as a distinct entity from the exploitation of and unlawful activities facilitated by, the traditional free port model. This is significant in a post-Brexit Britain where the British Ports Association (BPA) has initiated the development of free ports in the UK, less than a decade after existing legislation was not renewed. Free from the increased scrutiny of European Union (EU) lawmakers, the proposed UK free ports could be vulnerable to manipulation and have the potential to become secrecy jurisdictions for the tax-free storage of high-value goods and the facilitation of illicit activities. While recent scholarship illuminates the problems associated with existing free ports, this study will contribute to the literature surrounding a contemporary and relatively unexplored issue within the UK ports system and the art market.

The History of Free Ports Tax-free storage facilities and trading privileges are recognised as a form of territorial exceptionalism, a concept that has been in existence—at least in part—since antiquity. For as long as taxes have been in existence, people have sought ways to avoid and evade them. The Phoenicians are thought to have been the first to adopt tax deferrals and exemptions in the ninth century BCE as a means to create a trading network and facilitate cultural exchange in the Mediterranean Sea (Thoman 1956). In 166 BCE, Delos was declared a “free port” by Roman conquerors and although primitive by today’s standards, the port is believed to have operated, albeit briefly, as a thriving cosmopolitan trading centre (Chaniotis 2011). A similar network of duty-free zones, developed to strengthen business relations between member cities of the Hanseatic League, brought prosperity to the fourteenth-century Hanseatic ports, including the free cities of Hamburg, Bremen, and Copenhagen. Paul Goetz (1945) observed in the Wall Street Journal that, while the free port idea has been around for a thousand years, it found its “most romantic expression in the Hanseatic League” (1945), reaching the zenith of its power in the fourteenth century when its membership extended from towns in Italy through central Europe to Scandinavia and beyond. We may consider, however, that the Renaissance ports of Triste, Venice, and Livorno are the best

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and most well-known examples of the success of the early-modern free port model, evolving through the British, French, and Dutch empires, resembling more closely the ports of today. Traditionally intended as a means to temporarily suspend taxes for goods in transit, contemporary free ports are broadly defined by the World Bank (2008) as “part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory….and not subject to the usual Customs control” (9). Free ports are generally located in large, industrial areas ranging from seaports and airports to train stations and even entire territories. Exemplifying this, China is home to several of the world’s leading commercial gateways (Lavissiere and Rodrigue 2007), with Shanghai and Hong Kong operating as two of the most notable examples of territorial exceptionalism. These areas are referred to as “offshore” (Zarobell 2020) as the “activities that take place there are not subject to the regulations and statutory laws of the host country” (Zarobell 2020), resulting in significant tax advantages among other benefits. Unlike other Special Economic Zone models, free ports accommodate a wide range of private and commercial interests—including tourism, manufacturing, and sales—while providing an attractive variety of financial incentives for clients. Free ports differ from traditional Free Trade Zones in that they are not seen primarily as export drivers, but as areas that stimulate economic growth, linking the trade mechanism with the overall economy of the nation (OECD/FATF 2010). Among the free ports currently in operation, the Port Franc of Geneva has remained in constant use since the nineteenth century and as such, is perhaps best suited to illustrate the changing utility of the mechanism through time.

Geneva Free Port The Geneva Free Port first opened in 1854 under the authority of the Cantonal government of Geneva and initially consisted of just one warehouse that temporarily deferred import taxes on goods stored in the facility during transit (Post and Calvão 2020). Goods could therefore be unloaded and safely secured in this facility and would only incur duties at their final destination. This singular warehouse outgrew its demand and in 1888, in need of greater storage capabilities, the Cantonal government

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of Geneva opened a new, purpose-built hub and officially founded the Geneva Free Port and Warehouses Company to manage the site (Bonnett 2014, 128). According to Post and Calvão (2020), the area known as “La Praille” was historically used to store commodities in high demand such as “cereal crops, tobacco, alcohol, and tea” (5) but by contrast, today the Port Francs’ tenants include advanced logistics firms and highend art collectors (5). Consistent with the World Bank’s definition, the European Parliament verifies that in recent years, free ports have become increasingly popular for the storage of high-value assets including, but not limited to, “art, precious stones, gold blocks, and vintage wine collections” (Korver et al. 2018). The transition of the port’s utility from a simple produce store to a “highly secure environment…resembling Fort Knox” (Gompertz 2016) began in the 1970s when the Geneva Free Port, under extremely lax regulation and opaque record keeping, progressively specialised in storing high-value assets discreetly, for select wealthy clients (Guex 2016, 37–41). Switzerland has a long and complex history in finance and is best known for its banking secrecy and political neutrality. It became apparent during the early periods of Imperial expansion that the landlocked state would be unable to compete with the larger European powers such as Germany and France, therefore adopting a position of neutrality conflict was essential (Shaxson 2011). As Guex (2000) notes, “depositors were attracted by the protection offered by the solidity of the Swiss franc, by the political stability of the country, by its neutrality, by the mildness of its taxation laws… and by the existence of banking secrecy” (241). Initially, banking secrecy provisions were not formally legislated (Guex 2000) as they were based on tradition rather than regulation, but the Banking Act of 1934 secured the privacy and protected the rights of its citizens. This development has been attributed to the increased taxation of the wealthy in other European countries, providing Swiss banks the opportunity to compete with major financial centres; Guex explains that the Swiss provisions became a means of attracting foreign capital to Switzerland (2000). Under the 1934 Act, it became a criminal offence for Swiss banks to disclose the identity of their clients, regardless of nationality. For decades, Switzerland protected the identities and the finances of dictators, warlords, arms dealers, and celebrities alike. However, the level of anonymity afforded to depositors remains lower today. Latterly, a series of global efforts to clampdown on banking secrecy and tax evasion has brought greater transparency to traditional offshore

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methods, challenging the opacity of the Swiss banking structure and those who attempt to hide their dubious funds and ill-gotten gains. In the closing years of the 1990s, the Organisation for Economic Co-operation and Development encouraged presumed tax havens to exchange banking information with other countries on the basis of bilateral tax treaties, but until 2008 most tax havens failed to comply (Johannesen and Zucman 2014). The financial crisis of 2007–2008 saw a decisive shift in attitude towards the global tax avoidance problem, with wealthy nations making prevention and prosecution a priority. At the G20 summit held in April 2009, participating nations urged countries acting as tax havens to share information about cross-border bank activity “under the threat of severe economic sanctions” (Johannesen and Zucman 2014). By the end of 2009, over 300 treaties had been signed, but the ultimate success of these efforts is disputed, with critics indicating that the measures were not comprehensive enough, leaving potential for evasion (Shaxson and Christensen 2011). These secrecy jurisdictions were increasingly targeted by a series of multilateral and unilateral acts that made it difficult for individuals to escape taxation on proceeds of funds held in offshore bank accounts, yet it was not until 2018 when Switzerland began automatically sharing client data with tax authorities, ridding the system of the mysterious numbered Swiss bank account. The global clampdown on banking secrecy has however, led to a myriad of alternative offshore mechanisms, enticing foreign investors with distinct financial benefits, tax loopholes, and anonymity (The Economist 2013). Zarobell (2017) explains that for art “the free port has become the physical equivalent of the Swiss bank account” (235). It is a common misconception that the Geneva Free Port originated as a luxury facility, but it is important to recognise that the transition from storing grain to gold happened slowly, and initially, these high-end services were reserved only for a select few. The complex is alleged to have begun storing high-value objects in the late twentieth century, but it was not until the early 2000s that Yves Bouvier, the former heir to the moving and storage company Natural Le Coultre, refurbished the company’s premises at the freeport, declaring it a luxury facility (Knight 2016). Since the First World War, Natural Le Coultre handled the shipment of Red Cross parcels (Knight 2016) for prisoners, transporting citrus fruits and machinery, and everything in between. When Bouvier inherited the business from his father, he decided to take it in a different

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direction (Knight 2016), and it became a niche operation specialising only in painting and sculpture logistics. The growth of the global art market in the early-to-mid 2000s is thought to account for Bouvier’s decision. Between 2000 and 2007, the art market tripled in size, reaching a historical value at the time of just under $66 billion (McAndrew et al. 2016). Recognising the rapid growth of the market and the potential to profit from the increased assetization of high-value goods such as artworks, Bouvier placed himself in a prime position to benefit from “investment art”. As part of the refurbishment of the Geneva free port, Bouvier opened two art showrooms and encouraged a painting framer to open in the same facility (Knight 2016). Bouvier’s success in Geneva allowed him to expand operations, opening ultramodern facilities in Singapore in 2010, followed by Luxembourg in 2014. He was due to open in Shanghai several years later, but this project was postponed and never materialised as a consequence of the legal dispute between himself and Russian billionaire and art collector, Dimitry Rybolovlev. The ports in Singapore and Luxembourg were different from Geneva in that they were high-tech, purpose-built facilities with militarygrade security. Recounting his visit to Luxembourg free port, Samuel Weeks (2020) describes biometric scanners and magnetic locks referring to the facility as a “space where social and economic processes come together and are mediated by high technology” (3). The recently closed ARCIS facility, based in Harlem, New York, provided insight into the extreme measures taken for storage and preservation of art inside luxury free ports, In addition to the tax advantages of storing artwork in ARCIS’s freeport, the new building offers art transport, climate-controlled storage spaces, and fire, flood, and theft protection systems that are among the most cuttingedge in the world. In much of the building, the air is changed between three to six times an hour, depending on activity in the space. Padlocks to individual storage spaces are kept in a 21st-century key control box that tracks every movement of a key. (Kinsella 2018)

Promoted as, “The World’s Safest Storage Facility “ for Your Valuables”, Le Freeport, Luxembourg is described as asafe and secure storage for works of art, precious metals, vintage wines, antiques, jewels, documents and archives (physical and digital), collection cars, pharmaceuticals, rare minerals, and other valuables” (Le Freeport Luxembourg n.d.). The

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preservation, restoration, and security services offered within these facilities are legitimate benefits of storing artwork in a free port but, they are merely secondary benefits of the luxury free port mechanism. Le Free Port facilities in both Singapore and Luxembourg, operate boastfully as high-value storage facilities, and Delaware, USA is as brash as to describe itself as a “Safe Haven for Art” (Delaware Free Port n.d.). As with all luxury free ports, Delaware certainly provides a remarkable level of security for valuables, but it might be more appropriate to categorise it as a “Safe Haven for Tax Avoiders”. Luxury free ports, for example, allow an artwork to be purchased in New York and be transferred to an offshore facility without any Value Added Tax (VAT) being paid—only when the work arrives at its destination may it be taxed. This presents a problem as the artwork may never leave the facility, although it may change hands any number of times and be sold for a significant profit, without being subject to capital gains taxes. Although the seller would ordinarily be obliged to declare their income in their residence country, there would be no way for that country to know that the sale has taken place, which creates incentives for tax evasion. It has become known that wealthy collectors and even museums, display replica works in order to protect the original artworks which remain safely in storage (Charney 2020). While this may appear customary practice, likely for insurance purposes, it sheds light on the potential for forgeries and copies to remain safely in storage—while the rich enjoy the originals in their inaccessible private collections—free from the tax burden. The anonymity afforded to clients, the significant tax breaks, and indefinite storage options present clear evidence of luxury free ports’ complicity in asset hoarding, tax evasion, and avoidance. Concerns of tax evasion and avoidance take a central role in debates concerning free ports (Bowley and Carvajal 2016) and the art market, but many are equally, and understandably concerned about the assetization of art (Nixey 2019). When art is coveted only for its monetary worth and liquidity rather than intrinsic or artistic value and is then subsequently stored away in a free port vault—perhaps never to be seen again in this lifetime, intervention is indeed necessary. Critics will argue that once an artwork has been purchased by a private collector it is theirs to do with as they please, but by its very nature art is to be looked at, enjoyed, and studied. As artworks are hidden away as trophies and tax write-offs, the issue of commodity vs public good must be considered. Those who invest in art are rarely after a quick sale either, which could realistically

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see masterpieces held in storage for decades. Blue-chip2 names such as Warhol, Basquiat, Kusama, and Picasso are high-value assets in the global art market, as can be evidenced by the sale of Basquiat’s Jim Crow, 1986. The piece was purchased for $136,367 in 1992 and sold for $17,680,936 at Christie’s in 2017 (Art Price 2017)—125 times the original purchase price, after being held for just 25 years. Those with vast art collections will rarely have their riches constantly on show in their homes, instead opting for more secure locations and as such, it is evident that the luxury free port evolved from the traditional storage model as an alternative mechanism for private wealth management. Unfortunately, due to the secretive nature of free ports, and the blurred lines between tax evasion and avoidance, scholarship surrounding the development and the role of luxury free ports remains in its relative infancy. Despite this, it is understood that the free port mechanism operates as part of an evolving global ecosystem for the avoidance and evasion of taxes and concealment of criminal activities, as may be seen in several high-profile case studies. The Geneva freeport openly admits that in the past, it has been occupied by “undesirable tenants” (Velimirovi´c 2018) conducting illicit operations. In 1995, the first scandal to tarnish Geneva Free Port’s reputation was the revelation of documents that proved the existence of an international network of looted artifacts. Italian police gained access to Geneva Free Port for investigation and discovered that the Italian art dealer Giacomo Medici was hoarding illicit Roman and Etruscan antiquities inside his storage unit within the port, a considerable number of which were fraudulently sold on to eminent institutions and museums (Renauld 2021). In 2004, Medici was sentenced to several years in prison and a e10 million fine, but it was only the beginning of several scandals linked to Geneva Free Port and the practices which allowed him to evade applicable import and export, as well as sales taxes. In 2016, the Panama Papers data leak, comprising of over 11.5 million financial and legal records (Fitzgibbon 2021) exposed the complexities of the offshore world on a scale never seen before. The implications of this data leak were

2 Blue chip artworks are those which have been created by the most important and widely recognised artists, whose position in the auction market has been solidified by exceptional sales volumes. The term “blue-chip” is directly derived from the language of the stock market to describe high priced stocks, which is indicative of the role art plays in investment.

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profound (Worthy 2020, 255, 275) identifying a myriad of loopholeriddled legislation and profit-oriented tax havens which enable crime, corruption, and wrongdoing with relative ease. The longstanding restitution case Maestracci v. Helly Nahmad Gallery, involving Modigliani’s Seated Man with Cane, 1918 reveals the extent of the problem, and similarly, directly implicates the Geneva free port in intentionally obfuscating the ownership of high-value assets while deferring tax through shell corporations. The Geneva free port has been subject to further scrutiny concerning the contents of the facility which is estimated to hold an art collection of over $100 billion US dollars (Renauld 2021) although the figure is likely far higher today. Anonymity and discretion have proven central to this business model, thus the risk of tax evasion and the title laundering of stolen and illegally exported goods is a considerable cause for concern. Although forced to sell Natural Le Coultre following legal action, Bouvier allegedly still owes unpaid Swiss taxes on £276m of profits made through the sale of around £1.7bn to the Russian collector Dimitry Rybolovlev (Brady and Noce 2020). The Panama Papers data leak was the first significant indicator to those outside the financial elite that free ports were being used for such purposes but more recently, the 2021 Pandora Papers leak has further illuminated the use of free ports, by high-profile figures, as repositories of tax-free art, obscured by shell co-corporations (Alecci 2021). Data leaks have played a significant role in uncovering the truth, but the study published by the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance revealed the extent of the problem. The 2019 study (TAX3 Special Committee Report 2019) detailing the money laundering and tax evasion risks in free ports illuminated the secrecy and security that these ports offer, making them an attractive haven for those involved in not only tax evasion, money laundering and, asset hoarding but also terrorist financing and smuggling. The findings of this study alongside evidence gathered from several data leaks prompted the EU to regulate free ports more rigorously, with some calling for a plan to gradually phase out these economic zones entirely (Shaw 2019). The report presents compelling evidence that free ports around the globe are operating openly as conduits of tax evasion and avoidance. Reflecting contemporary geopolitical structures, the manifestation of social power, and the disproportionate distribution of economic wealth, the Luxury Free Port is a purpose-built, ever-evolving vehicle that works exclusively to serve the super-rich. From transshipment hubs and temporary storage

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facilities to modern high-tech ecosystems which preserve fine art, free ports operate outside of national jurisdictions, making them a dangerous tool in the wrong hands. As European lawmakers call for the urgent phasing out free ports in a bid to tackle money laundering and tax evasion, the UK looks to welcome them to boost the post-Brexit economy, causing concern among many that they will become caches for the super-rich (Woodcock 2020).

UK Free Ports The proposed benefits of UK ports have sparked controversy with many concluding that aside from the wealthy business owners, few are likely to benefit from freeports as the relaxation of rules within these zones often applies to employee, product, and environmental standards. As Sassen (2002) indicates, free zones often benefit foreign shareholders and the wealthy, but fail to bring prosperity to the general population or the country in which they are situated. Further research supports concerns that the re-introduction of free ports in Britain, free from EU restrictions, will have a detrimental impact on the wider economy. If free ports reduce tax contributions from businesses to the Treasury this has the potential to burden the average personal taxpayer with higher rates (Merrick 2021), while the government inevitably gifts further tax breaks to global corporations. Government officials have made assurances that UK free ports are intended to help regenerate former industrial regions, but a 2019 study carried out by Centre of Cities indicates that British free ports are unlikely to provide highly skilled jobs, instead creating low waged jobs in warehousing (Swinney 2019), which may lead to a diminishing workforce in other industries. The potential failure of these ports to reinvigorate British industry remains a possibility, especially following the fate of the UK’s earlier free ports. Between 1984 and 2012 the UK was home to seven free ports, the legislation of which the Cameron premiership allowed to lapse without renewal, due to the alleged oversaturation of free ports across Europe and the regulatory constraints placed on them by the EU (Clarke 2018). This leads us to question what regulatory restraints the UK are hoping to bypass or reform. 2020 marked an important year for financial regulation, with the Fifth Anti-Money Laundering Directive (AMLD5) coming into effect,

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drawing further unwanted attention to the art market and free ports. Changes included widening the scope of the definition “obliged entities” to include UK art businesses, and similarly, Persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to e10,000 or more. (Directive (EU) 2018/843)

The UK government implemented this legislation before its exit from the EU, and while they have yet to specify any significant changes to their Anti-Money Laundering regulations, it is supposed that amendments will be made in the future—particularly as they have often criticised the restrictive regulations of the EU in the past. The Sixth Anti-Money Laundering Directive (AMLD6) came into effect for EU member states in December 2020 requiring implementation by June 2021. The UK chose not to incorporate these amendments, on the basis that the current laws laid out in AMLD5 already address the essential aspects of antimoney laundering. AMLD6 however, widens the scope of its directives in response to changing threats so that accomplices and enablers of money laundering activities will be penalised, as well as individuals and legal entities (Directive [EU] 2018/1673). Furthermore, States will now also be required to criminalise certain offences regardless of their legality, or otherwise, within their jurisdiction. The EU has committed to enhancing the anti-money laundering and countering terrorism financing regime—recognising that existing legislation has been insufficiently and inconsistently implemented and applied at a national level and seeks to rectify this by releasing an “ambitious package of legislative proposals” (Financial Stability, Financial Services and Capital Markets Union 2021) by 2024. What this legislation will encompass remains to be seen however, given the EU’s fractious relationships with its free ports—it is not implausible that it will look to restrict free ports further. Whatever the EU legislation dictates, the UK will of course not be bound by it. High-level British Members of Parliament vehemently deny that UK free ports will be used as luxury storage facilities but without legislation explicitly prohibiting this many see it as an inevitable consequence, particularly as the UK is home to the world’s second-largest art market, a standing which is under threat in the post-Brexit art market climate. Before Brexit, the UK art market held a competitive position among other

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EU countries as its value-added sales taxes were “among the lowest in Europe—and, in many cases, were not applied at all” (Brown 2021). As Brown (2021) explains, An art dealer sending a painting to a client in Italy, where the VAT is 10% could formerly save a little money by shipping it via the UK, where the VAT is only five 5%. As the UK is no longer part of the EU, the buyer or seller would be forced to pay the additional 10% VAT upon its arrival in Italy. This change could negatively impact the robust auctions sector and make secondary art markets such as France—which has one of the next lowest VAT rates, at 5.5%.

It is reasonable to assume that lower taxation rates are more desirable for those operating within the art market therefore, this may cause sales traffic to shift away from the UK art market, even towards EU free ports. Many suggest that in order to protect the UK’s standing in the art market, the negative impacts of Brexit on the London art market should be mitigated quickly and wherever possible. Some support lowering VAT for the art market but due to the UK’s current economic climate, this idea is unlikely to meet popular consensus. Therefore, it is conceivable that free ports may come to play a more central role in the UK art market, emulating the regulatory practices of those in Singapore and Delaware as a means to attract much needed foreign investment and in turn creating purposebuilt, tax-free, safe havens for art.

Conclusion Lucy Sollitt, a specialist of the art market, is among those who doubt the genuine benefits that the UK art ecosystem could gain from the reintroduction of free ports. She explains that, The negative implications are easier to see: increasing opacity of sales transactions; further increases in investment-driven speculation; and potential to remove artworks out of circulation in public institutions. When new buyers and existing collectors alike are overwhelmingly saying they want the market to be more transparent, how can freeports be a good thing? (Sollitt 2019 quoted in Harris 2021)

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The re-introduction of free ports in the UK, post-Brexit, certainly requires careful and ongoing observation. As the EU moves towards the stricter regulation of these trade mechanisms, it is possible to assert that the British government—now under its own sovereignty—may adopt more lenient measures, particularly as a means of attracting foreign investment as illustrated by the example of Geneva. While it is unclear whether UK free ports will in fact intersect with the art market and become repositories for high-value goods, no such legislation exists at present to prevent this from becoming a reality. We might conclude that if government officials were certain that these free ports would not become luxury storage facilities for the purpose of hoarding assets and hiding wealth, it would have been set out in the initial free port prospectus. As the EU experience shows, tax havens have evolved to resist ineffectual and poorly implemented legislation and the damage they inflict upon tax systems, democracies, and the global economy is exacerbated. A greater understanding of both the traditional and luxury free port models is crucial in stemming the surge of financial crime within such considered, purposebuilt mechanisms. Most importantly however, regulatory practices must be implemented accordingly, in order to mitigate the negative impact of free ports and close the legal loopholes which have allowed other tax regimes to be abused, to the detriment of those not among the one percent.

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PART II

Tax Evasion: Extent, Causes, and Conflicts

CHAPTER 9

Income Tax Evasion and Avoidance in Germany, 1850–1920 Marc Buggeln

Income tax (and progressive tax on global income even more so) only slowly became enacted in the nineteenth century. For example, it established itself as a permanent institution in German states in the second half of the nineteenth century. At the national level, it was only introduced in Germany—and also in most European states—in the twentieth century. Since most states were interested in a long-term implementation of income tax through acceptance by their taxpayers, the authorities did not apply very high rates, even for top incomes. Until 1914, the higher marginal rates generally remained below 10%. In addition, the authorities did not fight tax evasion and tax avoidance too sharply, on the one hand because they often lacked the political and institutional possibilities to do so, but on the other hand to avoid providing a reason for tax protests.

M. Buggeln (B) Humboldt University Berlin, Berlin, Germany e-mail: [email protected] Free University, Berlin, Germany

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_9

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Even before the First World War, Switzerland in particular became a tax haven (Guex 2021). This role was further accentuated during the war, offering citizens and companies of the warring states opportunities to hide their income from their domestic tax authorities (Farquet 2016). This resulted in the Reichsfluchtsteuergesetz (Reich Flight Tax Act) of 1917, the first law dedicated solely to tax evasion and an attempt to curb it. Despite the low enforcement of penalties for income tax offences, the following will examine how attempts were made in German states (using the examples of Prussia, Saxony, and the Hanseatic city of Bremen) to achieve knowledge about citizens’ incomes and to prevent tax evasion and tax avoidance. Focusing on the example of Saxony, the chapter analyses how these practices changed during the First World War and how the change in the political situation at the end of the war even made the aristocratically led finance ministry in that state see tax evasion as a patriotic act. The sections on Prussia are based on statements in the available literature. There is hardly any literature on questions of tax evasion and tax avoidance in Bremen and Saxony until 1914, which is why I have carried out archival research there. It should be noted, however, that there are virtually no documents on the subject in the Bremen State Archives and that only the Saxon State Archives had a broader inventory on matters concerning the Saxon Ministry of Finance, which played a decisive role in determining the weighting of the essay. Whereas for Bremen we can therefore mainly deal with the formal regulations for combating tax evasion and their official organisation, for Saxony we can say more about the concrete actions of the authorities.

Tax Collection and Evasion of UK Income Tax Britain was a world pioneer in the enforcement of income tax. Established in 1799 by Prime Minister William Pitt the Younger, the temporary income tax was a generalised tax that assessed all income collectively, from all sources. Due to extensive opposition to the state’s need to know about such a tax, and extensive tax evasion by mercantile interests, which resulted in returns well below what was expected (Cousins 2018), Prime Minister Henry Addington allowed the generalised income tax to lapse and instead established a schedularised income tax in 1803

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(Hope-Jones 1939, 22–23; Sabine 1966, 26–41, 60–74). This form of income tax distinguished five forms of income and assessed them separately. This remained the case when, in 1842, Prime Minister Robert Peel permanently reintroduced the tax after its expiry following the end of the Napoleonic Wars. The advantage of the schedule system was that a large part of the income was taxed directly at source. Schedule A was the tax on rents of real estate and houses. It was paid at source by deduction from rent. The property owner received the income net of tax. In Schedule C the tax on profits from public securities was deducted at source by the Bank of England. In Schedule E, salaries and pensions from offices were taxed. They were also collected at source. In these three schedules, tax evasion was hardly possible. Only in Schedules B (agricultural profits) and D (profits from trade, commerce, and the professions) was collection at source largely impossible and tax evasion therefore more likely (Hope-Jones 1939, 20–21). In the mid-nineteenth century, more than 60% of income tax revenue came from Schedules A, C, and E, which hardly allowed for tax evasion. This changed markedly, however, with the acceleration of industrialisation and the global flow of goods. By 1910, Schedule D, with taxes on trade and commerce, generated almost 60% of total revenue. But even in Schedules B and D, the tax administration had developed better possibilities to verify the taxpayers’ data through the use of trade statistics and other tax statistics. In 1905, the tax authorities therefore assumed that 70–80% of tax-relevant income could either be collected at source or verified with certainty (Daunton 2001, 186–187). The main work of Schedule D assessment was done by locally elected members of the respective community, these being mostly from the business community. The danger here was that the local community would ensure that incomes were underestimated. This was all the more likely because local tax assessors could neither be punished nor dismissed for misrepresentation. Thus, their essential self-interest in correct tax estimates consisted of their percentage share of the tax revenues. The Central Board of Revenue tried on several occasions to make officials responsible for Schedule D assessments, but they failed to do so until the beginning of the First World War because of opposition from Parliament (Daunton 2001, 184–204). In addition, citizens had considerable scope to appeal against their assessment, while the authorities’ powers of intervention remained limited in the short term (Stebbings 2009; Seligman 1911, 81). Estimates made by contemporaries varied widely as to how large the share of tax evasion was, ranging in most cases from 1 to 20% of the actual commercial revenues (Daunton 2001, 197–198).

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Progressive and Comprehensive Income Tax in German States The difference between Germany and Great Britain was that the German states introduced a comprehensive or general income tax, i.e. a tax on global income (as opposed to schedular tax income), throughout, and usually endowed it with a progressively increasing tax rate. In addition, the tax system in the German Empire was not uniform for income tax, but instead, each state had different tax rates and tax exemption limits. While in Great Britain one thus had to pay basically the same income tax rate regardless of location and income level, this was not the case in Germany. In addition, the municipalities in many German states levied different surcharges on income tax. For people with high incomes, moving across municipal or state borders in Germany could therefore lead to reduced tax payments. This was a danger that German municipalities and states kept an eye on when it came to tax levels, but also with regard to tax penalties. A search of German newspapers available online (https://www.deu tsche-digitale-bibliothek.de/newspaper) shows that the term ‘tax evasion’ has been mentioned in newspapers since the middle of the nineteenth century at the latest, but only at a low level. It is only in the twentieth century that more mentions are found, and a significant increase took place from 1916 onwards. Before World War I, most of the mentions were about the reporting of punishments against tax evasion and often against repeat offenders. In some cases, the names of the offenders and the amount of the fines to be paid were also mentioned. The majority of the cases involved evasion by smaller businessmen, which only attracted attention in local newspapers.1 As regards more extensive tax evasion, however, such cases could also attract attention throughout the Reich: for example, the sentencing of Professor Fünfstück of the Technical University of Stuttgart to a fine of 20,000 Marks,2 or the physician Dr. Hans

1 For example: Bamberger neueste Nachrichten 21 February 1877; Schweinfurter Anzeiger 30 November 1877, Rosenheimer Anzeiger 17 February 1889. 2 Berliner Tageblatt und Handels-Zeitung, Abend-Ausgabe 4 October 1911, p. 4.

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Jost in Rüdesheim to a fine of more than 12,000 Marks.3 Up until the First World War, the cases dealt with were mainly the concealment of income at home. The term ‘tax evasion’, which particularly characterises the transfer of income and assets abroad, only entered the reports of German newspapers from the second half of the First World War.

Criminal Tax Law and Tax Evasion in Prussia German criminal tax law was strongly based on the Roman tradition. Whereas in Roman criminal law there had to be an intent to cause damage, punishment in customs and tax law was an exception. In the case of non-compliance with the rules, punishment could take place without proof of intent. The penalty was usually a fine equal to twice the amount evaded, the so-called ‘duplum’. Until well into modern times, it remained the case in German customs and tax law that an intention did not have to be proven in order for a penalty to be levied. Additionally, in many German states, the fine was increased from double to several times the amount evaded (Poggemann 1997, 17–25). In addition to the fine, corporal punishment, imprisonment and honour sentences could also be imposed. As a rule, however, these could only be imposed if either law enforcement officials had been assaulted or if the debtor was unable to pay the fine. Honour penalties, in particular the public naming of the offender, were a feature of the law, above all in the Excise Duty Act 1818, if the person concerned was proven to have committed similar evasion for the third time. But in the second half of the nineteenth century, honour penalties disappeared completely from Prussian tax law (Poggemann 1997, 35–72). In the second half of the nineteenth century, legislators increasingly oriented criminal tax law towards general criminal law. With the Reichsstrafgesetzbuch (Imperial Criminal Code) of 1877, the understanding of guilt had finally become the central issue (Poggemann 1997, 68). Accordingly, proof of deliberate action and intent to evade now played a greater role in the level of punishment in tax law. In the Income Tax Act of 1891, the penalty was set at four to ten times the amount evaded and at a minimum of 100 marks if there was intent to evade the

3 Berliner Tageblatt und Handels-Zeitung, Morgen-Ausgabe, 29 October 1913, p. 7.

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tax. The minimum amount was reduced to between 20 and 100 marks if the tax evasion was “knowingly, but not with the intention of evading tax” (Prussian Income Tax Act 1891, § 66). However, at the same time a regulation was introduced that was completely alien to criminal law. With the Income Tax Act, the government made it possible for the tax evader to be exempt from punishment in the case of self-disclosure, as long as no charges had been brought against them or no investigation had been initiated against them (Prussian Income Tax Act 1891, § 66). Thus, an offender was exempted from punishment after committing the crime and making a confession. Consequently, the state’s interest in generating income clearly dominated in this case over considerations of criminal law (Poggemann 1997, 114–115). Criminal tax law was given little attention by both finance scholars and criminal lawyers because it was always on the fringes of their own field. The person who dealt with the topic most comprehensively in the German-speaking world was Franz Meisel (1853–1939), a financial scientist and senior finance councillor in the civil service in Austria-Hungary. In 1902 he examined Austrian criminal tax law, which had largely adopted Prussian criminal tax law for income tax (Meisel 1902). Meisel came to the conclusion that the regulations were not very consistent, concluding “that this apparatus cannot function and cannot apply the standards” (Meisel 1911, 6). At the same time, from his point of view, the accessible statistics seemed to speak of successes of the criminal tax law in Prussia itself, which is why Meisel then examined the practices of Prussian criminal tax law and assessment techniques in 1911. Meisel’s main criticism was aimed at the integration of criminal tax law into general criminal law and the necessity of proving an intention to evade tax. He said that this would hinder criminal prosecution too much because the intention could hardly be proven. He therefore pleaded for criminal tax law to be oriented towards administrative criminal law, where a criminal intention was largely irrelevant to the sentence. According to Meisel, the act should be sentenced regardless of its motivation (Meisel 1911, 58–59). Meisel therefore registered his hope that in the Baden income tax laws of 1900, as well as 1906, intention was no longer a prerequisite for punishment (Meisel 1911, 60). He considered income tax honesty to be achievable only if the dishonest were punished and the punishment was not meted out on paper only. He therefore advocated harsher punishments than before. In 1865, the professor of economics Carl Julius Bergius had already called for fines to be imposed only on

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poorer tax evaders, following the example of Karl Ruppenthal, president of the Cologne government, and for prison sentences to be imposed from the outset on the richer tax evaders, because these would hit them harder (Bergius 1865, 345). This was a demand that Meisel supported, but which had no chance of being realised (Meisel 1911, 47). However, Meisel considered the emergence of a new oligarchy through growing inequality to be so dangerous that he considered imprisonment to be justified. This was also because the results achieved by the comparatively successful Prussian tax authorities seemed to him too small to stop the growing inequality. For example, in 1906, Prussia made 216.79 million marks in revenue from income tax. Of this, 140.97 million marks came from incomes over 3000 marks. Of these, 31.32 million were assessed and corrected, resulting in an additional revenue of eight million marks, which was, however, almost halved by court costs (Meisel 1911, 82). And Meisel provided the following Table 9.1. Meisel averred that with such a high number of proven incorrect tax returns, the number of criminal proceedings remained extremely low. In 1908, out of 175,255 cases of proven false declarations, there were 1232 criminal proceedings, i.e. 0.7% of the cases (Meisel 1911, 50). To Meisel, the high court costs for criminal proceedings seemed justified in order to at least maintain the threat of punishment, but on the other hand, the Table 9.1 Corrected tax returns and additional revenues from Prussian income tax, 1900–1908 Year

Total tax returns submitted

% corrected tax returns

Additional revenue in marks

% more than the originally assessed tax amount

1900 1901 1902 1903 1904 1905 1906 1907 1908

506.229 537.152 555.343 567.412 593.836 624.530 647.932 705.263 738.363

25.1 24.8 24.9 23.9 24.0 23.7 23.5 22.7 23.7

7,901,000 9,310,960 8,382,724 6,469,654 6,921,440 7,632,097 7,970,664 10,129,848 10,928,523

33.9 38.0 32.5 30.3 31.8 34.0 34.1 35.2 34.9

Meisel (1911, 8)

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very formal proceedings, even for smaller entitlements, seemed clearly too costly. In addition, the yield appeared to him to be too low to establish tax justice: “The income tax is based on the self-declaration principle for larger incomes. These are to a large extent incorrect; the material truth cannot be found as a result of the way things are” (Meisel 1911, 88). Thus, Meisel was left only with the hope of a change in the legal basis of criminal tax law and an improvement in the techniques of income tax collection. Another frequent criticism of the Prussian income tax procedure—which Meisel surprisingly did not discuss—was that tax collection in the countryside was carried out by an individual, who was called the Landrat, rather than a specialised tax administration. This made it possible for other large landowners to be under-assessed by the Landrat, who was often himself a large landowner, and could lead to little confidence among the rest of the population that the procedure was fair. However, in Prussia in the second half of the nineteenth century, a change began in the allocation of the Landrat office away from the large landowner towards the career civil servant, who often still came from the class of the large landowner, but who also sometimes had considerable loyalty to the state (Wagner 2005, 379–567).

Bremen The Hanseatic City of Bremen is often mentioned in descriptions of tax policy as the first German state to introduce a permanently levied income tax in 1849. However, this income tax was in reality a so-called ‘Einkommensschoss’. This meant that once a year, citizens with an income of over 250 Reichstalers entered a room where there was a chest and deposited in it a sum they considered appropriate. However, the Senate at least specified what was to be considered reasonable. By 1871, all were to pay proportionally at least 1% of their income. For 1872, a tax rate of 1.5% was proposed for higher incomes, and for 1873, with the extension of tax payment to lower incomes, a scale of 0.33 to 2%. With this form of income taxation, the Bremen government did not know who had paid how much, individually. Accordingly, until that time there could be no thought of combating tax evasion because it was perfectly legal not to put anything in the coffers. For a long time, however, the Bremen Senate was highly satisfied with the tax morals of its

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citizens and made no effort to change this simple and inexpensive procedure. This was also due to the fact that it was essentially the urban elite who paid the tax and who could be sure that the municipal bodies they dominated spent the money in their interests. In contrast, the democrats who were extremely active in the 1848 revolution in Bremen, and who essentially came from the middle classes, were not able to provide enough deputies to gain greater influence in the State Parliament (named Bürgerschaft) for a long time after the Restoration, due to the restrictive class suffrage law (Schulz 2002, 582–585). Due to this political dominance of a small merchant elite, Bremen’s political system can be characterised as a republic with a strong aristocratic touch (Zahn 1915, 268). More precise conclusions about Bremen’s social stratification can be drawn from the income statistics. According to the calculation of the Statistical Bureau, an average of 5569 citizens paid income tax in the years 1847–1851. With a population of 79,102 in the entire state in 1849, this corresponded to about 7% of the population. However, as a realistic benchmark, one must use the heads of households as a comparative figure, i.e. about 25,060 households in the territory (4.5 persons per household). Accordingly, the share of income taxpayers then increases to 22.2%. At least one-fifth of the state’s population was thus above the average annual income of a craftsman of 250 Reichstaler, which was considered the lower limit of tax liability (Waldthausen 1911, 142, Table X). The historian Herbert Schwarzwälder arrived at a similar overall classification for the 1850s. According to this, about 2000 heads of household (17% of the population), with an annual income of over 500 Reichstalers, belonged to Bremen’s upper class. This group had higher voting rights due to their income, and thus determined Bremen’s politics. The upper middle class, with an income of 250–500 Reichstalers, comprised about 1400 heads of household (12%). The remaining 71% had an annual income of less than 250 Reichstalers and were therefore not entitled to vote (Schwarzwälder 1995, 170–171). With the significant growth of the city population in the second half of the nineteenth century—Bremen had about twice as many inhabitants in 1900 as in 1850—the consumer-oriented professions of food and clothing trades also gained ground again. Around 1870, the building contractor and land agent was regarded as a model of a successful economic citizen: he was a symbolic figure of bourgeois society, he embodied the social advancement of the small craftsman, the change from adequate economic activity to commercial entrepreneurship. Many members of the middle

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class thus moved up into the highest tax bracket, but they were slow to gain political representation. For them, the incentive to pay less tax was much greater, because they had less influence on its use than the oldestablished urban elite. In any case, the senate and the parliament were increasingly dissatisfied with the income of the revenue raft, so that the demand for an individually verifiable income tax payment became louder and louder. On 28 March 1875, a modern progressive income tax was therefore introduced in Bremen. It had, however, a low maximum rate. The lowest rate was 0.125% for incomes up to 800 marks, the highest rate of 1% was reached for incomes over 9000 marks. Until 1876, Bremen also had a ‘Vermögensschoss’, but this form of wealth tax was abolished with the introduction of the modern income tax. On the other hand, inheritance tax had a far greater significance in Bremen, as in the other Hanseatic cities, than anywhere else in the Reich. In Bremen, its revenue was higher than in the whole of Baden, and only just below the figures for Württemberg and Saxony, states with a much higher population. Hamburg even had the second highest inheritance tax revenues after Prussia (Zahn 1915, 301). Before the introduction of income tax, Bremen had modernised its tax administration in 1867. With the establishment of a General Tax Office, the collection of all taxes was united under one authority. A fundamental reorganisation also took place with regard to personnel relations. While the tax collectors had previously financed themselves and their employees through a share of some of the collected taxes, salaries were now introduced for the employees of the General Tax Office and there was no longer any participation in the tax revenues. The supreme authority over income tax, however, was given to the tax deputation, which consisted of twelve members of the Bürgerschaft. The General Tax Office was subordinate to this deputation. Collection offices were responsible for collecting the tax, these offices also being subordinate to the tax deputation. The city was divided into four districts for tax collection. For the assessment of income, eight tax citizens were elected by the citizenry for each district. The tax citizens made an initial assessment, which could then be corrected by the tax deputation and a revision committee. The tax deputation then sent the assessment, sealed, to the citizens. If they did not agree with the assessment, they had four weeks to appeal. A complaints committee was responsible for any

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objections, consisting of a member of the Senate, a member of the Bürgerschaft, and a tax citizen. Legal action could then be taken against its decision. The statutory administrative penalties for delayed payment were the responsibility of the tax deputation and could lead to compulsory enforcement.4 The punishment for false statements from self-assessments was then regulated in the Income Tax Act of 1874 itself. Section 11 stated: “Whoever makes false statements with regard to the estimation of his income, or of an income represented by him (Section 7), shall, depending on the degree of his intentional or negligent fault, be liable to a fine of up to ten times, and in case of repetition up to twenty times, the amount of tax withheld from the state, subject to any penalties forfeited under the Penal Code”.5 The Bremen authorities thus took their cue from criminal law and imposed different levels of punishment depending on the individual intention to commit fraud—as judged by them. In addition, there were fines for defaulters (§ 12). So far, hardly anything can be said about the practice of prosecuting tax evasion. The impression gained so far from archival research is that the tax deputation worked closely with the administration for the poor in the case of taxpayers with lower incomes who were in arrears and, in the case of insolvency through no fault of their own, was also prepared to defer or even cancel the tax debt. However, if the guilt for not being able to pay was suspected to lie with the tax debtor, enforcement was often resorted to.6 Extensive investigations or lawsuits in cases of tax evasion by the recipients of large incomes, on the other hand, rarely occurred. The Senate, the Bürgerschaft, and the tax deputation seemed to have been more afraid of wealthy people moving to the Prussian hinterland.

4 Gesetz, betreffend die bei Erhebung der Einkommensteuer zuständigen Behörden

vom 25 October 1874, in: Gesetzblatt der Freien Hansestadt Bremen 1874, 87–90. 5 Gesetz, betreffend die Einkommensteuer vom 17.12.1874, in: Gesetzblatt der Freien Hansestadt Bremen 1874, 121–130, here 125. 6 See the books of the revision committees: Staatsarchiv Bremen, 4, 26–309 and 310 and the minutes of the tax deputation on the resolutions on income and poor relief tax matters 1888–1905, Staatsarchiv Bremen, 4, 26–307.

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The German Pioneer of Progressive Income Tax: Saxony 1874–1914 In 1874/1878, the Kingdom of Saxony was the first large German territorial state to introduce a progressive income tax (Mathiak 2005; Schremmer 2002, 24–47; Schremmer 2003). This was also due to the fact that Saxony was one of the centres of industrialisation in Germany and the prosperity of the population had increased considerably, especially in the urban centres (Karlsch and Schäfer 2006). Saxony was a worldwide pioneer of a comprehensive personal income tax, while most states had previously followed the British schedular system. In 1899, Saxony was also the first German federal state to introduce a form of inheritance tax, which differentiated the tax rates according to the amount of the inheritance (Lieb 1992, 111–112). Saxony was also advanced in matters of tax administration, with its Income Tax Act of 1878 (Hoffmann 1906, 73–86). The state tax authorities were organised into four tax districts, with 25 district tax collection offices under the direction of state tax officials, who also headed the local assessment commissions. The assessment commissions comprised three to six honorary members from the respective municipalities, who were elected for two years. With the introduction of income tax, the number of civil servants and employees jumped from 25 (1880) to 337 (1905). The training of civil servants was professionalised. At the turn of the century, entry requirements for office assistants were a secondary school diploma and a three-year apprenticeship; for a post as tax secretary, a high school diploma was required (Mathiak 2005, 72–75). Only the main tax district officer was a lawyer, while the heads of the 25 collection offices were tax specialists who rose from positions as office staff (Blüher 1913, 621). The rights of taxpayers vis-à-vis the state were also clearly regulated. The tax debtor could appeal against the tax assessment to a complaints commission, which was headed by the district tax secretary. An appeal against their decision could be lodged with the Ministry of Finance. From 1901 onwards, the Ministry of Finance was replaced as the final appeal authority by the Saxon Higher Administrative Court (Nostitz 1903, 124– 131). Saxony not only preceded Prussia with the establishment of a modern income tax law, but also drew a larger proportion of its population into income tax. The American jurist Kossuth Kent Kennan, father of George F. Kennan, assumed shortly after the turn of the century that Chemnitz

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was the city in which the largest proportion of the population of any city in the world was subject to income tax. In 1908, 111,381 of about 275,000 inhabitants in the prosperous Saxon industrial metropolis were assessed, i.e. just over 40% (Kennan 1910, 120). This was also due to the fact that in Saxony, income was only tax-exempt up to 300 marks, while in 1914 higher exemption limits existed in the other large territorial states (Neubrand 1916, 260). Overall, the income tax burden on the lower classes was heavier in Saxony than in the other territorial states. In addition, dependent employees in Saxony were hardly able to evade income tax, because a general obligation of workers to provide information had been passed for permanent employees (Maatz 1906, 125–126). The high incomes that factory owners earned through industrialisation also led to often considerable tax evasion. In 1911, in Oberreichenbauch (the Plauen district), it turned out that a spinning mill owner named Kraus had declared his annual income as 1947 marks, but the business books showed that he had an income of 11,650 marks and that his high income over the years had enabled him to buy securities worth over 25,000 marks. Despite the considerable amount evaded, only a relatively small fine of 2544 marks was imposed, due to the first-time nature of the offence.7 However, thanks to the relative efficiency of Saxony’s tax administration, the extent of tax evasion and avoidance appears to have been lower in Saxony than in other states. A comparison with Austria-Hungary shows it. The income tax in Austria-Hungary, with a top rate of 6% at the turn of the century, was designed to be more progressive than the models in Saxony and Prussia. However, since the tax administration was considered poorly trained and ineffective, contemporary financial scholars assumed a very high level of tax evasion. In particular, agricultural income and profits from capital assets were said to have escaped income taxation almost entirely (Meisel and Spiethoff 1915, 22–24; Blumenthal and Nerré 2003). This thesis is supported by the fact that the Kingdom of Saxony, which had only one-sixth of the population of Austria-Hungary and lower tax rates (albeit with a higher average income), collected 70 million marks (equivalent to 82 million Austrian crowns) in 1913 from its income tax, while Austria-Hungary collected only about a quarter more, that is 102 million crowns (Meisel and Spiethoff 1915, 25).

7 Sächsische Volkszeitung 4 March 1908, p. 6.

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When Franz Meisel wrote about the weaknesses of the Austrian and Prussian tax authorities, this was carefully noted in Saxony and used to present its own strengths to the professional public. Chief Administrative Court Councillor Blüher emphasised that in Saxony the training of tax collectors had progressed far better than in Prussia or Austria, and that only specialised tax officials were employed in the decisive positions. In addition, Saxony did not have such a strict complaints procedure as Prussia, which meant that smaller cases could be solved more unbureaucratically and at lower cost (Blüher 1913; in a similar manner: Wachler 1912). Meisel himself was somewhat more sceptical about the Saxon selfpraise. He saw a similarly high number of complaints in the first instance as in Prussia, but noted positively the lower number of complaints in the second instance. He thus saw hints of a better set-up in Saxony, but emphasised that more detailed figures were missing in Saxony that would ensure a valid comparison with Prussia (Meisel 1914, 162).

Tax Avoidance and Evasion in Saxonia in WWI At the beginning of the war, the authorities acted with great restraint with regard to tax collection because they did not want to give any cause for discontent. In the smaller town of Potschappel, for example, it was decided to forego possible means of coercion for a short time. The phase of waiving collection only lasted ten days, but it showed the uncertainty of the authorities.8 It can also be shown for Saxony that until 1914, almost without exception, every insult to members of the tax assessment commissions that was reported also led to proceedings. After the war began, the Ministry of Finance was more lenient. It now left it at a clear admonition of the delinquents, “since it would like to avoid such criminal proceedings at the present time, unless very special reasons make prosecution appear necessary”.9 The situation was different, however, if the accused was generally regarded as rebellious and lacked the desired patriotism in regard to the

8 Potschappel Parish Council to the Royal District Tax Collection of 1 October 1914, in: SLHAD, 10851, Nr. 6676. 9 Note of the Saxon Ministry of Finance, Department I of 14 August 1915 on the libel action against the merchant Richard Wenzel (Bischofswerda), in: ibid., Nr. 6617.

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war from the point of view of the Saxon Ministry of Finance. An indicative example is this mill owner in Magwitz: “Indicative of Pastor’s way of thinking is also a statement he made at the time when the Russians had invaded East Prussia, on a railway journey in the presence of the now deceased manor owner Fulda from Magwitz, to the effect that he did not care at all whether he became a Russian or anything else. Accordingly, it would hardly be appropriate to withdraw the criminal complaint”.10 In the summer of 1915, a serious case of tax evasion in the academic milieu caused discussion in the Saxon Ministry of Finance. The tax evader was Prof. Dr. Paul Zweifel, privy councillor and head of the gynaecological clinic in Leipzig, who had also been rector of Leipzig University in 1901/1902. Through his declarations for the military service contribution, it had come to light that Zweifel had not previously declared the interest income from his considerable assets. In addition, the municipal assessment commission had estimated his income at a very low level for years. It was not until a new chairman of the assessment commission doubled Zweifel’s expected annual salary in 1914 from 30,000 to 60,000 marks, without the latter protesting, that the authorities took notice. After Zweifel realised that his misconduct had been uncovered, he disclosed previously hidden assets to the tax office in the hope of benefiting from a very generous general pardon offered by the Saxon state to repentant tax evaders at the time. But Zweifel still did not declare all his hidden assets, which meant that the prospect of the general pardon was gambled away when the tax investigation finally uncovered the full extent of the evasion. There was great indignation in the Leipzig city council about his behaviour, so Zweifel was sentenced to pay a fine of eight times the evaded amount of 86,440 marks. At the same time, Zweifel escaped a prison sentence and the proceedings did not attract any major public attention, so that his reputation remained largely intact and no references to his serious tax evasion can be found in biographical entries to this day. The outcome of the proceedings prompted the Commission’s chairman to append an unusual epilogue to the final report on this state of affairs: “Such multiple millionaires as he should, as people who are at the top of science and society, not make deals for themselves out of the general pardon. After all, man does not need more than he needs to live—and live very luxuriously; this realisation should protect people with 10 Letter Bezirkssteuereinnahme Ölsnitz to Kreissteuerrat in the Third Tax District of 9 August 1918, in: ibid.

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Table 9.2 Top Rates of Income Tax 1917/18 (in %)

State tax Community tax Together

Prussia

Bavaria

Saxonia

Wuerttemberg

Baden

8.0 12.0 20.0

8.0 6.0 14.0

8.0 15.2 23.2

6.5 3.75 10.25

6.5 5.2 11.7

List of the Bavarian Ministry of Finance from spring 1918, in: Sächsisches Landeshauptarchiv [Saxon State Archives] Dresden (SLHAD), 10851, Nr. 5591.

fortunes and incomes from excessive avarice leading to the ‘most fantastic’ tax evasions. If a poor family man, in order to set aside some savings and emergency pennies for his family from his meagre income, falsely declares, this is humanly understandable and humanly excusable; in the case of people who accumulate thousands upon thousands and who, according to human judgement, can never get into need as a result of their secure position, tax evasion is a disgrace and should not be punished with a fine, but with imprisonment, loss of honour, and publication of the sentence’s tenor”.11 However, he could not get through to the leaders of the Saxon Ministry of Finance with these arguments. There, it was considered more expedient to continue to encourage wealthy tax evaders to self-declare by means of the pardon and thus secure the state access to the full tax for the now disclosed assets, at least for the future. The government had no interest in imprisonment and a public exposure of the social elite. On the contrary: towards the end of the war, the leaders of the Saxon Ministry of Finance even increasingly regarded tax evasion as a patriotic act, as will be shown. The problems of tax collection intensified significantly in the warring nations during the First World War, because the high costs led to an increase in tax rates. The differences between the income tax systems in the north and east of Germany and the real tax systems in the south weakened in the process, but they were still discernible at the end of the war. The top income tax rates in Prussia and Saxony, the two major German states that levied income tax, were still significantly higher than in southern Germany, as shown in Table 9.2. 11 Report of the Kreissteuerrats in the II. Steuerkreis of 30 August 1915, in: SLHAD, 10851, Nr. 6605.

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In the course of the war, the problem of the hitherto usual concealment of income was increasingly joined by that of tax evasion abroad, which was essentially due to increased tax rates in the warring nations. The First World War strengthened Switzerland’s position in the international tax evasion market. One of the notable consequences of this strengthening was the beginning of what is now known as whistleblowing. Informants from Switzerland began to offer the German authorities the data of German tax evaders, without it being clear from the sources at my disposal whether they were acting on their own initiative or whether they had been induced to ‘spy’ by the authorities of their State. In March 1916, the Customs and Tax Directorate in Karlsruhe wrote to the Saxon Ministry of Finance: “A former employee of a Basel banking institution informed us last year that he was in a position to name numerous persons living in the German Reich territory who had deposited securities with this bank”.12 In exchange for a share of 8% of the legally enforceable tax amounts collected, he had handed over a list of tax evaders to the Baden Ministry of Finance, whose data had proven to be reliable and had brought the state of Baden considerable additional tax revenue. AlsaceLorraine had also received a list under the same conditions. The informant offered to provide Saxony with a corresponding list in return for this payment. The Saxon Ministry replied: “The undersigned Ministry would like to express its gratitude for the kind communication of 23/25 March 1916. According to local customs, however, there are reservations about the use of the source of information offered, and the Ministry is therefore unable to make use of the grateful offer”.13 While Baden used the data offered and brought tax evaders to court, Saxony voluntarily gave up additional revenue. Towards the end of the war, Saxony’s finance minister became less and less interested in prosecuting tax evaders. His rejection of a proposed 1918 ‘Federal Law against Tax Evasion’ anticipated the pliant, even positive attitude of right-wing parties in the Weimar Republic towards tax evaders, which went on the counter-attack with highly belligerent national rhetoric. In March 1918, he declared: “Only if the Reich leadership does not fulfil its duty towards 12 Letter from the Karlsruhe Customs and Tax Directorate to the Saxon Ministry of Finance dated 23 March 1916, in: ibid. 13 Letter from the Saxon Ministry of Finance to the Karlsruhe Customs and Tax Directorate dated 29 March 1916, in: ibid.

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the German people, if it places the interests of the enemies or the vain delusion of reconciliation through leniency, or the will of deluded Reichstag deputies or those infatuated with fixed ideas higher than the welfare of the German people, will tax evasion threaten. In very many cases, however, it will not be based on ‘dishonourable and patriotic sentiments’ […] but on the very natural and very justified feeling that it is not the business of the individual German who has wanted a German peace to sacrifice his money and his and his family’s economic future for the sins which the Reich leadership has committed against the German people”.14 The Saxony finance minister thus took the view that the Reich’s leadership, which was far too liberal for him, was to blame for the high taxes because of its refusal to continue collecting the war costs from the soonto-be-defeated enemies. Since liberalism had driven Germany into the abyss, so the logic went, tax evasion now became a patriotic act.

Outlook However, the Reich Flight Tax Act, which was rejected by Saxony, was passed in July 1918.15 It became even more important after the end of the war because the revolution, Soviet republics and rising taxes frightened the owners of capital in Germany even more. Sometimes this led to adventurous attempts to transfer capital abroad. In July 1919, for example, the Hamburg Senate received a telegram from the Reich Commissioner for Import and Export Licences, according to which the voluntary border guard in Schleswig had learned that Rhenish banks wanted to move 20 million marks in paper money to Denmark or Sweden on coal steamers in the following few days.16 In addition to the methods for combating income tax evasion through under-declaration, which had previously only been developed in rudiments, the transfer of large incomes and assets abroad now emerged as a further problem. The Reich government also reacted to the new requirements by tightening the law. Whereas in the previous jurisdiction the principle applied 14 Statement of the Saxon Minister of Finance of 26 March 1918 on the Federal Law against Tax Evasion in: SLHAD, 10851/5625. 15 Gesetz gegen die Steuerflucht vom 26 July 1918, in: Reichsgesetzblatt 1918, p. 951. 16 Telegramm des Reichskommissars für Aus- und Einfuhrbewilligung an den

Hamburger Senat vom 16 July 1919, in: Staatsarchiv Hamburg, 111–1, 25908.

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that everyone was free to do anything that was not prohibited in order to minimise their taxes, § 5 of the Reich Tax Code of 1919 introduced the offence of tax avoidance. It stated: “Tax liability cannot be evaded or reduced by abuse of forms and means of arrangement under civil law. Abuse within the meaning of paragraph 1 occurs if, in cases where the law subjects economic transactions, facts, and circumstances to a tax in the legal form corresponding to them, unusual legal forms not corresponding to them are chosen or legal transactions are undertaken in order to avoid the tax”.17 This definition left the tax administration some leeway to define what could be considered abuse, which led to sometimes sharp criticisms of the regulation (Rosendorff 1920), but it has remained as an offence in German tax laws to this day (Oberheide 1998; Konrad-Osterloh 2019).

Bibliography Bergius, Carl Julius. 1865. Grundsätze der Finanzwissenschaft mit besonderer Beziehung auf den preussischen Staat. Berlin: Verlag von J. Guttentag. Blüher, Oberverwaltungsgerichtsrat. 1913. Die Verwaltung der direkten Steuern im Königreich Sachsen. Deutsche Juristen-Zeitung 18: 620–623. Blumenthal, Karsten von, and Birger Nerré. 2003. Tax Culture in NineteenthCentury Austria. Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association 96: 54–62. Cousins, Katherine. 2018. The Failure of the First Income Tax. A Tale of Commercial Tax Evaders? The Journal of Legal History 39 (2): 157–186. Daunton, Martin. 2001. Trusting Leviathan. The Politics of Taxation in Britain, 1799–1914. Cambridge: Cambridge University Press. Farquet, Christophe. 2016. La Défense du paradis fiscal suisse avant la seconde guerre mondiale: Une histoire international. Neuchâtel: Éditions Alphil. Guex, Sébastien. 2021. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review 95: 1–20. Hoffmann, Alexander. 1906. Die direkten Staatsfinanzen im Königreich Sachsen mit besonderer Berücksichtigung der allgemeinen Einkommensteuer. Leipzig: Jäh & Schunke. Hope-Jones, Arthur. 1939. Income Tax in the Napoleonic Wars. Cambridge: Cambridge University Press.

17 Deutsche Reichsabgabenordnung vom 13 December 1919, in: Reichsgesetzblatt 1919, pp. 1993–2107, here p. 1994.

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Karlsch, Rainer, and Michael Schäfer. 2006. Wirtschaftsgeschichte Sachsens im Industriezeitalter. Leipzig: Edition Leipzig. Kennan, Kossuth Kent. 1910. Income Taxation. Methods and Results in Various Countries. Milwaukee: Burdick & Allen. Konrad-Osterloh, Christine. 2019. Die Steuerumgehung. Eine rechtsvergleichende und rechtstheoretische Analyse. Tübingen: Mohr. Lieb, Ralf. 1992. Direkte Steuerprogression. Geschichtliche Entwicklung und kritische Würdigung ihrer Begründungen. Wiesbaden: Deutscher UniversitätsVerlag. Maatz, Regierungsrat. 1906. Die Novelle zum preussischen Einkommensteuerund Ergänzungssteuergesetz. FinanzArchiv 23 (2): 116–131. Mathiak, Walter. 2005. Das sächsische Einkommensteuergesetz von 1874/1878. Dresden: Saxonia. Meisel, Franz. 1902. Das Strafrecht der österreichischen Einkommensteuer. FinanzArchiv 19: 1–92. Meisel, Franz. 1911. Moral und Technik bei der Veranlagung der preußischen Einkommensteuer. Leipzig: Duncker & Humblot. Meisel, Franz. 1914. Wahrheit und Fiskalismus bei der Veranlagung der modernen Einkommensteuer. FinanzArchiv 31 (2): 144–168. Meisel, Franz, and Arthur Spiethoff. 1915. Österreichs Finanzen und der Krieg. Munich/Leipzig: Duncker & Humblot. Neubrand, Finanzamtmann Dr. 1916. Die Belastung mit direkten Staatssteuern in Preussen, Bayern, Sachsen, Württemberg und Baden. FinanzArchiv 33 (2): 244–262. Nostitz, Hans von. 1903. Grundzüge der Staatssteuern im Königreich Sachsen. Jena: Gustav Fischer. Oberheide, Ralf. 1998. Die Bekämpfung der Steuerumgehung. Frankfurt am Main: Peter Lang. Prussian Income Tax Act. 1891. Preussisches Einkommensteuergesetz vom 24. Juni 1891, In FinanzArchiv/Public Finance Analysis 8 (2): 331–451. Poggemann, Martin. 1997. Schuld und Strafe in der jüngeren Entwicklung des preußischen Steuerstrafrechts. Frankfurt am Main: Peter Lang. Rosendorff, Richard. 1920. Steuerersparung Steuerumgehung Steuerhinterziehung. Ein Beitrag zum Rechte der Reichsabgabenordnung. Berlin: Industrieverlag Spaeth & Linde. Sabine, Basil E.V. 1966. A History of the Income Tax. London: Allen & Unwin. Schremmer, Eckart. 2002. Warum die württembergischen Ertragssteuern von 1821 und die sächsische Einkommensteuer von 1874/1878 so interessant sind. Stuttgart: S. Hirzel.

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Schremmer, Eckart. 2003. Einfach und gerecht? Die erste deutsche Einkommensteuer von 1874/78 in Sachsen als Lösung eines Reformstaus in dem frühindustrialisierten Land. In Integriertes Steuer-und Sozialsystem, ed. Manfred Rose, 191–214. Heidelberg: Physica. Schulz, Andreas. 2002. Vormundschaft und Protektion. Eliten und Bürger in Bremen 1750–1880. Munich: Oldenbourg. Schwarzwälder, Herbert. 1995. Geschichte der Freien Hansestadt Bremen, Vol. 2: Von der Franzosenzeit bis zum Ersten Weltkrieg 1810–1918. Bremen: Edition Temmen. Seligman, Edwin R.A. 1911. The Income Tax. A Study of the History, Theory and Practice of Income Taxation at Home and Abroad. New York: Macmillan. Stebbings, Chantal. 2009. The Victorian Taxpayer and the Law. A Study in Constitutional Conflict. Cambridge: Cambridge University Press. Wachler, Paul Gustav. 1912. Die Sächsische Organisation der Steuerverwaltung. Verwaltungsarchiv 20 (4/5): 352. Wagner, Patrick. 2005. Bauern, Junker und Beamte. Der Wandel lokaler Herrschaft und Partizipation im Ostelbien des 19. Jahrhunderts. Göttingen: Wallstein. Waldthausen, Fritz. 1911. Der Bremer Vermögensschoss im Rahmen der direkten Besteuerung Bremens im XIX. Jahrhundert. Stuttgart: Union. Zahn, Ernst. 1915. Die Besteuerung der Erbschaften in den Hansestädten, unter besonderer Berücksichtigung Bremens. FinanzArchiv 32 (1): 267–309.

CHAPTER 10

Volume, Social Distribution, and the Instrumentalisation of Tax Evasion in Switzerland: The Case of Zurich, 1860–1945 Sylvain Praz

In 1910, Charles J. Bullock, a professor of economics at Harvard University, presented an overview of taxation in the Swiss cantons. In Zurich, he wrote, the situation was almost as bad as in the United States: at least 50% of the wealth that should be taxed escaped taxation. Bullock’s conclusion was straightforward: “Swiss experience […] demonstrates that the most Draconian laws and rigorous administration are powerless to reach the great man of personality when the tax rate exceeds the bounds of reason and moderation” (Bullock 1910, 84).

S. Praz (B) University of Lausanne, Vaud, Switzerland e-mail: [email protected]

201 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_10

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The use of the Zurich example to assert that direct taxes with high rates automatically led to serious problems, extensive tax evasion being the most important, was not rare in international literature before World War I (Leroy-Beaulieu 1906, vol. 2, 202–221; Seligman 1914, 358– 363, 428). This brief historical overview highlights two important points. First, tax evasion is crucial to studying taxation. It is not a marginal phenomenon, but a structural dimension of tax regimes (Meisel 1925). Second, the thematisation of tax evasion is driven by tax policy goals, whether on a political level or, more indirectly, in the academic field. However, there have been very few attempts from a historical perspective to estimate the extent of tax evasion, let alone its social distribution and its political implications. This contribution aims to quantify and exemplify the decisive influence that tax evasion had on the tax policy of Switzerland’s largest canton, Zurich, and of the Swiss Confederation in general. The first part focuses on the cantonal level, from the 1860s to the end of World War I. The second part extends the focus to the federal level, covering the period from World War I to World War II. Particular attention is paid to the estimates produced by contemporaries on the extent of tax evasion and its social distribution.

The Extent of Tax Evasion and Its Social Distribution (1860–1919) Figure 10.1 shows the extent of evasion discovered through estate inventories between 1860 and 1918. Until 1869, these were based on guardianship inventories. From 1870, inventories were also conducted for the inheritance tax introduced that year, which exempted inheritances in direct lineage, however. Based on an annual average of figures between 1860 and 1918, 38% of the reported wealth from inventories was not declared, with a slight downward trend over the whole period. However, it is important to emphasise that these data do not measure the true extent of tax evasion, but rather a lower threshold. Both inheritance and guardianship inventories were notoriously inaccurate, subject to only superficial control, and they grossly underestimated actual wealth.1 What these data show is that

1 Bemerkungen betr. Amtliche Inventarisation, [1902], Staatsarchiv des Kantons Zürich (StAZH), Zurich, R 131.1.9.

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the volume of tax evasion was high, and that even very rudimentary control means were already able to uncover considerable amounts. It is also crucial to realise that these estimates only provided a general overview of the extent of tax evasion, while the aggregated data only gave a mean value. Almost 60% of these inventories did not discover any evasion, and among the ones that did show tax evasion, there were huge differences, with some taxpayers evading a much bigger proportion of their tax liability than others. Another method used at the time to approach the general extent of tax evasion was to indirectly determine, using non-tax data, the wealth that should have been taxed, and compare it with the wealth that was actually declared. Table 10.1 provides a summary of such estimates for the period before World War I. 70

60

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1916

1914

1912

1910

1908

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1900

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1894

1892

1890

1888

1886

1884

1882

1880

1878

1876

1874

1872

1870

1868

1866

1864

1862

0

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Fig. 10.1 An estimation of tax evasion on wealth based on inventories (1860–1918) (Sources 1860–1868: “Bericht des Regierungsrathes zu dem Gesetzesentwurf betreffend die Vermögens-, Einkommens- und Aktivbürgersteuer”, 28.09.1869, in: Amtsblatt des Kantons Zürich [Amtsblatt], p. 1676; 1869– 1899: Bericht über die Finanzlage des Kantons Zürich, 28 November 1901, pp. 71–73, Schweizerisches Sozialarchiv [SozA], Zurich, KS 336/28; 1900– 1918: Rechenschafts-Bericht des Regierungsrates an den Zürcherischen Kantonsrat [Rechenschaftsbericht], various years)

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Table 10.1 Indirect estimations of wealth that should have been taxed (millions CHF)

Estimation of taxable wealth Declared wealth Evaded wealth as a percentage

1868

1888

1896

1902

1912

1100 569 48

1500 870 42

2000 1098 45

2433 1261 48

3002 1794 40

Sources 1869: “An den Zürcherischen Verfassungsrath”, 25 August 1868, Amtsblatt, p. 1892; 1888, “Mängel in unserem Steuerwesen”, Neue Zürcher Zeitung (NZZ), 22 September 1888; 1896, Ganz besonders ist die Revision des Steuergesetzes vom 24 April 1870 vom Standpunkte einer gerechten Steuerverlegung geboten, [s.d.], pp. 21–28, StAZH, R 131 c2; 19,031,902, Zu den Entwürfen für ein zürcherisches Steuergesetz, 1903, pp. 4–7, StAZH, R 131.1.9; 1912, “Gesetz betreffend die direkten Steuern”, 10 August 1912, Amtsblatt, pp. 722–724.

According to these estimates, which were calculated in a rather conservative fashion, around 40–50% of theoretically taxable wealth evaded taxation. These results were not disputed at the time. Until World War I, it was customary in Zurich to say that half of the wealth evaded taxation (Greulich 1891, 8–9; Wolf 1897, 2). The consensus was also that the situation was no better regarding income taxation. Despite the lack of statistical data before the end of World War I on this matter, anecdotal evidence was abundant.2 At the end of World War I, a particular event gave new insights into the level of evasion. In 1919, a new tax act, adopted in 1917, was enacted. One of its main goals was to fight tax evasion. Considering the differences in the definition of the tax base and inflation, taxed income increased by 107% while taxed wealth rose by 132%.3 In summary, it is safe to say that in Zurich, until 1919, at least half—and probably even more—of taxable matter evaded taxation. These last two methods of estimating the level of tax evasion did not offer direct insights into the social distribution of tax evasion. The published data on the tax revision of 1919 only offered a glimpse into the geographical distribution of tax evasion, which showed very significant differences between the regions of the canton. However, a more detailed breakdown of the inventories provides indications about the social distribution of tax evasion. Table 10.2 offers a 2 See, for example, “Vom Steuern”, Zürcherische Freitagszeitung, 21 August 1908. 3 Rechenschaftsbericht 1918 and 1922.

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Table 10.2 Wealth discovered through inventories according to the wealth level of taxation (1890–1896) Wealth taxed before the inventory (1' 000 CHF) (1)

0 0.1–5 5.1–10 10.1–20 20.1–50 50.1–100 100.1–200 200.1–400 >400

Number of inventories (2)

257 934 409 335 328 125 64 35 29

Total wealth Total taxed before reported the wealth inventories through the inventories (1' 000 CHF) (3) (1' 000 CHF) (4) 0 2316 3196 5066 10,519 9233 9029 9506 31,068

2864 5259 5937 8420 19,127 14,304 14,793 14,743 48,222

Mean of the newly discovered wealth per taxpayer (CHF) (5)

The proportion of wealth that was not taxed (%) (6)

11,144 3151 6702 10,011 26,243 40,568 90,069 149,629 591,517

100.0 56.0 46.2 39.8 45.0 35.5 39.0 35.5 35.6

Source “Gesetz betreffend die direkten Steuern und Abänderung einiger Bestimmungen betreffend Gemeindesteuern. Weisung”, 16 October 1899, Amtsblatt, p. 1015.

synthesis of the inventories carried out between 1890 and 1896, showing how tax evasion was distributed between taxation levels. The government published these data in 1899, based on earlier work from Jakob Walder, a member of the cantonal Parliament representing agricultural interests (Walder 1895). This table requires some qualification. First, when a taxpayer died, an inventory was done less than one time out of 10 (HSSO 2012, C. 28). This was because, among other reasons, no inventory procedure was pursued in cases of notorious poverty. Accordingly, this table does not account for the great mass of people who clearly had no wealth and therefore, by definition, could not evade taxation. Second, these inventories not only underestimated the actual taxpayers’ wealth, as mentioned above, but they contained important biases. In particular, movable assets were more likely to escape these inventories than real estate.4 Since large fortunes consisted to a greater extent of such movable assets, the degree of tax evasion of large fortune holders was 4 Bemerkungen zum Gesetzesentwurf betreffend die direkten Steuern, [1910], pp. 10– 11, StAZH, R 131.3.

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therefore underestimated compared to that of small fortune holders. This also explains why large parts of the petty bourgeoisie, and especially the farmers, were consistently opposing the introduction of the compulsory inventory at death.5 The government also published additional data, which broke down taxpayers according to the degree of evasion.6 These showed that evasion was more evenly distributed in the upper classes, while in the lower taxation brackets some taxpayers evaded very heavily—and in fact owned considerable wealth—while the majority declared their wealth correctly or almost correctly. At that time, the conclusions drawn from the figures in Table 10.2 varied according to the reading grid. For Walder, the decisive factor was the amount of wealth evaded (Column 5). This led him to a clear conclusion: “These few figures provide us with convincing proof that with increasing wealth, evasion increases not only proportionally, but almost quadratically; that the less well-off are far more likely to meet their tax obligations than the rich” (Walder 1895, 12). Walder’s intervention came at a time when the cantonal farmers’ organisation, to which he belonged, was demanding state measures to support farmers hard hit by the crisis of the 1880s. Fighting tax evasion was a way to shift the financing of the planned measures onto the wealthy, and largely urban, segments of the population.7 In his interpretation, the government focused primarily on the intensity of evasion in relative terms (Column 6), and concluded that evasion was widespread and comparable among all classes. It added that these results demonstrated the effectiveness of the estate inventories, stressing that they did not only affect the ‘middle class’, a widely held point of view at the time, but also the rich.8 This served to argue that most taxpayers had a material interest in strengthening measures to fight evasion.

5 See, for example, “Weisung des Regierungsrathes an den hohen Grossen Rath zu dem Gesetzentwurfe betreffend die Vermögens- und Einkommenssteuer”, 8 March 1860, Amtsblatt, pp. 328–329; “Landwirtschaftsklub des Kantonsrates und Steuergesetzvorlage”, Zürcher Bauer, 14 January 1916. 6 “Gesetz betreffend die direkten Steuern”, 16 October 1899, Amtsblatt, p. 1016. 7 XXI. Kommission für Hebung des Nothstandes in der Landwirthschaft, Report of the

First Section, December 1891, StAZH, R 131.1.6. 8 “Gesetz betreffend die direkten Steuern”, 16 October 1899, Amtsblatt, pp. 1014– 1017.

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Finally, the professor of economics at the University of Zurich, Joseph Esslen, who published similar figures for the period 1900–1907, also supported the view that evasion was of a similar intensity among all social classes (Esslen 1910, 36–37). He argued that this phenomenon was primarily a consequence of the high tax rates on wealth and this in return demonstrated the necessity of lowering wealth taxation. This interpretation was in line with the policy advocated by business interests, which will be discussed below. However, these interpretations concerning the relative equal intensity of tax evasion between the different classes of taxpayers need to be considered critically. Classifying tax evaders according to their taxation level, and not according to their newly discovered total wealth, reduced the rate of evasion in the upper brackets while raising it considerably in the lower ones. Furthermore, these data focused only on the taxpayers who were subject to an inventory, and not all taxpayers. Some other sources can help us to shed some light on these biases. Between 1896 and 1916, the city of Zurich published detailed data on tax recoveries, i.e. on all the cases where tax evasion had been discovered. Most of the tax recoveries resulted from the inventories described above, although some resulted for other unspecified reasons. Table 10.3, below, gives some insights into the social repartition of tax evasion that can be gained from these data by cross-referencing them with the general tax statistics. These data show that the cases where tax evasion was discovered were extremely rare compared to the number of taxpayers. On average, the number of tax recovery procedures each year reached around 0.14% of all taxpayers in the jurisdiction of the city of Zurich. This does not mean that tax evasion was particularly rare in the city of Zurich. Rather, it shows that the controls of the tax authorities were extremely weak and ineffective, and as a result, tax evaders stood very little risk of being caught. Table 10.3 also indicates that the frequency with which a taxpayer evaded—or rather with which they were caught—increased rapidly with higher wealth. Taxpayers who were not subject to the wealth tax were almost 43 times less likely to be subject to a recovery procedure than taxpayers taxed on more than 300,000 CHF, while this ratio was six times between taxpayers taxed up to 10,000 CHF and on more than 300,000 CHF. This difference cannot be fully explained by a higher rate of controls among rich taxpayers. Those who were not taxed on wealth were only about 20 times less likely to be subject to an inventory than taxpayers

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Table 10.3 The proportion of taxpayers who were caught evading taxes in the jurisdiction of the city of Zurich, according to the level of taxable wealth (1896– 1916) Class of taxation, before the recovery procedure (1000 CHF) (1)

0 300

Number of taxpayers (1912) (2)

Number of tax recoveries (mean 1896–1916) (4)

The proportion of taxpayers for which evasion was discovered (% column 4/2) (5)

53,305 12,506 2793 2153 2893 704 584

19 26 14 11 21 4 7

0.03 0.21 0.49 0.50 0.74 0.56 1.28

Sources Geschäftsbericht des Stadtrates von Zürich an den grossen Stadtrat (Geschäftsbericht Stadtrat), 1896–1916; Übersicht der Vermögens- und Einkommenssteuerpflichtigen des Kantons Zürich […] vom Jahre 1912, 1914.

taxed on more than 300,000 CHF, while this ratio was 2.5 between taxpayers taxed up to 10,000 CHF and on more than 300,000 CHF.9 The conclusion that big taxpayers evaded more often is also consistent with the data from the government (mentioned above), which showed that tax evasion was more homogenous among the upper classes. In summary, the general conclusion is as follows: based only on the inventories data, it would seem—as Column 6 of Table 10.2 indicates— that the intensity of evasion was similar for all levels of wealth, or even that it was higher among those with small fortunes. This conclusion, however, is misleading, for three reasons: (1) it doesn’t take into account the fact that those in the upper brackets were evading more often than those in the lower brackets; (2) it doesn’t classify taxpayers according to their newly discovered wealth (a sum that would be closer to their actual wealth), but according to the level of taxation before the inventory was done; and (3)

9 The calculations are based on the data from Table 10.2 and the tax statistics from 1897. The results are almost identical if we take the data from Esslen and the tax statistics from 1906.

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inventories were more effective in discovering the kind of wealth owned by small taxpayers than richer ones. If we take these elements into account, it will certainly appear that in fact the richer taxpayers evaded tax on a higher proportion of their wealth than the less wealthy ones. At the time, this conclusion was also widely supported at the political level. Especially among the worker movement, and in part among the petty bourgeoisie and the cantonal administration too, it was considered a fact that tax evasion profited, first and foremost, the richest people in society (Greulich 1891, 9; Walder 1895, 4, 8, 12; Vademecum 1917, 23–25, 44–56).

The Political Mobilisation of Tax Evasion Before World War I In 1870, the Democratic Party took power from the Liberals and introduced a new tax law, based primarily on a progressive wealth tax and with complementary partial taxation on income. From this date, the problem of tax evasion had been central to the government tax policy proposals and, in subsequent years, for the representatives of the labour movement. Reducing evasion was a way to increase tax revenues, especially from the wealthiest segment of the population, with two main goals: financing new policies in favour of the petty bourgeoisie and the working class, respectively, as well as reducing taxes on small taxpayers. The main measure proposed to fight tax evasion—the compulsory inventory at death—met with considerable resistance, however, and its introduction failed, despite numerous attempts (Schanz 1890, vol. 2, 409–427; Ernst 1903, 103–203). From the mid-1890s onwards, the capitalist circles had considerably strengthened their involvement in the definition of the canton’s fiscal policy.10 For these circles too, tax evasion had become a central issue, for two main reasons. First, two political actors—the Bauernbund, a radical anti-modernist movement with an anti-capitalistic rhetoric that was especially strong among small farmers, and the labour movement—were

10 Much of what follows is based on Praz (2016).

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rapidly growing. Both demanded policies to shift the tax burden onto the shoulders of the wealthy classes.11 Second, increased public spending made a rise in tax rates predictable.12 Yet, these were already comparatively high in Zurich. According to calculations by the main association of big business at the cantonal level, the Handelskammer (the Zurich Chamber of Commerce), the theoretical taxes in Zurich at the beginning of the twentieth century on fortunes of 100,000 CHF or more were between two and five times higher than in other large cities in Switzerland or Germany (Richard 1902, 19). In practice, these taxes were massively evaded. However, according to the Handelskammer, these rates were nevertheless detrimental to Zurich’s position as a business location amid the increasing tax competition at both Swiss and international levels.13 The main danger for the capitalist circles was the latent possibility of serious law enforcement and increased controls.14 In the context of growing pressure from the workers’ movement, the peasantry, and possibly larger sections of the petty bourgeoisie, the high tax rates could harm the interests of the capitalist circles if the political authorities decided to implement anti-evasion policies. Yet this was precisely the direction in which the Government seemed to be moving in the 1890s, which culminated in a draft for a new tax law, published in 1899.15 It included a series of measures—most prominently taxation at source for bonds and an extended duty of disclosure for third parties—which, if properly implemented, would have considerably limited the possibility of evading tax on movable assets. In this situation, the Handelskammer elaborated a counter programme that was published in 1901 (Richard 1901). Its main objective was to reduce tax rates. To this end, tax evasion had a double instrumental utility. First, the high rates were accused of being the main cause of evasion, 11 For example, “Die Steuerinitiative des Bauernbundes”, NZZ , 19 March 1896; “Stadtzürcherische Steuerverhältnisse”, Der Grütlianer, 30 December 1897. 12 Cramer-Frey, Conrad, “Zürcherische kantonale Aufgaben”, NZZ , 1 December 1896. 13 On tax competition and the Swiss tax haven at that time, see Guex (2022). 14 This analysis presents similarities to the one from Hindman regarding the property tax in the United States at the end of the nineteenth century (Hindman 2010, 19–20, 27–28, 37–38). 15 “Gesetz betreffend die direkten Steuern und Abänderung einiger Bestimmungen betreffend Gemeindesteuern. Weisung”, 16 December 1899, Amtsblatt, pp. 981–1032.

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which in turn made it possible to present the reduction in rates as a fully fledged anti-evasion measure. Second, untaxed wealth was presented as a reserve that could be tapped into. In this perspective, a reform reducing tax rates would automatically reduce evasion, which in turn would raise tax revenues, despite the lower rates. In short, Zurich’s business circles wanted a tax reform to break the pattern of the so-called ‘vicious circle’ of high rates/high evasion and replace it with a logic of low rates/low evasion.16 Some additional measures to fight tax evasion were accepted in this framework by the Handelskammer, primarily the centralisation and professionalisation of the tax administration. The goal was to make taxations more homogenous throughout the canton, as some local tax authorities were much laxer than others, which was a source of conflicts between taxpayers.17 The means of control targeting movable assets that the government proposed, however, were strongly rejected. At first, the policy advocated by the Handelskammer remained in the minority in Parliament. The government wanted first to reinforce the means of controls, while a lowering of the tax rates could only come second; the wage earners’ representatives feared that a policy of lower tax rates would shift the tax burden onto their shoulders; both worried that lowering tax rates would cause a decline in tax revenues. However, to break the longstanding political deadlock, at the beginning of World War I the Socialist Party and the Finance Department accepted the main postulates of the Handelskammer, including a reduction of the tax rates, thus enabling a majority that could carry the project forwards at the political level. The war made a reform of the tax regime urgent for wealthy taxpayers in Zurich. In 1915, for the first time in its history, the Swiss Confederation made significant use of direct taxation, with the introduction of a war tax. The notoriously massive tax evasion in Zurich drew criticism from other cantons, who argued that Zurich’s taxpayers did not pay their fair share of the war tax (Guex 1993, 147–148, 352–355, 371–373). This prompted the possibility of a coalition forming between the ruling circles of other cantons and the indigenous wage earners in order to centralise 16 The concept of the ‘vicious circle’ was widespread to describe the tax regime in Zurich at the time and had been popularised by Wolf (1897, 2). 17 For example, Cramer-Frey, Conrad, “Das Zürcherische Steuerwesen vor dem Kantonsrathe”, NZZ , 17 December 1888.

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taxation procedures at the federal level and take measures to curb tax evasion. In addition, the results of the first federal tax assessment revealed very large unreported assets in Zurich that were likely to impact future cantonal assessments.18 Reforming the tax regime was a way to alleviate these risks while implementing already existing demands from business circles to position Zurich advantageously in the intensifying tax competition. In November 1917, a new tax act was adopted by the citizens of Zurich that fully expressed these views. Limited measures to curb evasion were introduced, while tax rates, especially on wealth, were significantly reduced. In addition, taxpayers could benefit from a tax amnesty.

Tax Evasion in Zurich During the Interwar Period and the Second World War The Tax Act of 1917, which came into force in 1919, undoubtedly reduced tax evasion. As mentioned above, taxable income and wealth more than doubled. Several factors explain the success of the 1917–1919 reform. The means of control were somewhat extended, and penalties for evasion were also higher. More importantly, a professional, centralised administration with a much larger staff was created. Finally, the reduced rates ensured that more complete tax returns—encouraged through the newly gained insight from federal taxations—in combination with the amnesty, did not imply significantly higher taxes. However, tax evasion remained an important issue. As Fig. 10.2 shows for the city of Zurich, evasion caught by inventories had indeed decreased, but was still generally in the range of 10–20%, this time regarding both income and wealth.19 As for Fig. 10.1, it should be stressed that these inventories underestimated considerably the true extent of tax evasion. There were still many ways to conceal wealth and revenue from the authorities who conducted

18 Minutes of the Cantonal Parliament, 12.02.1917, pp. 1564–1565, StAZH, MM 24.50 KRP 1917/081/0505; see also Guldenmann (1918, 78–83) and Praz (2016, 143– 146, 151–156). 19 The inventories carried out from 1919 onwards in the canton of Zurich had the specific aim of also controlling income for the last three years of the deceased taxpayer’s life. Wegleitung für die Behandlung der Steuerinventare, 23 January 1922, p. 1, StAZH, Z 353.14.

10

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1945

1944

1943

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1932

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1927

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1925

1924

0

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Revenue

Fig. 10.2 An estimation of tax evasion on wealth and revenue based on inventories (1923–1945) (Sources Geschäftsbericht Stadtrat, 1923–1945)

them, especially regarding movable assets.20 In 1938, Ernst Nobs, the Justice Minister from Zurich and a member of the Socialist Party, indicated that the value of the declared taxable matter (wealth and capital) “corresponds pretty much to the value of the real estate, not including securities and bonds”.21 This would indicate a situation analogous to the estimates made before World War I (Table 10.1), and a level of tax evasion of around 40%. If we consider that the truth lies somewhere in between, a general estimate of tax evasion of around 25–30% on wealth and income for the interwar period in Zurich seems realistic. Furthermore, as previously explained, these numbers only express means about the degree of tax evasion, but no information on its social

20 Report of the Secretary of the Finance Departement Walter Schneebli, Aufgaben des Steuerkommissärs gegenüber dem Inventar und im Nach- und Strafsteuerverfahren, 16 September 1921, pp. 2–3, StAZH, Z 353.14. 21 Geschäftsleitung der Sozialdemokratische Partei des Kantons Zürich, 10 April 1938, p. 7, SozA, Ar.27.10.22; see also “Für eine gerechte Steuerreform”, Volksrecht, 31.12.1935.

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distribution. The data from a tax amnesty granted in 1936 can help to shed some light on this aspect. Table 10.4 shows which taxpayers, according to taxable income level, used this amnesty to regularise their situation, and cross-references this data with the 1934 tax statistics, the closest available. As the tax capacity increased, the proportion of people who declared previously hidden taxable matter increased as well. At the same time, this tax amnesty was not linked with new measures against tax evasion that targeted high income or income from securities (Fehr and Praz, 2023: 174–176). Accordingly, this result constitutes a clear indication that tax evasion was much more widespread among higher-income earners than in the rest of the population (Table 10.4). On the political level, the 1930s and World War II was a time of intense struggle regarding tax evasion, this time at the federal level. To cope with growing deficits, the Confederation levied a crisis tax from 1933 onwards, the application of which was once more left mainly to the cantons (Ceni 2008; Müller 2010). This accentuated the fiscal and financial competition between cantonal authorities, which manifested itself in greater or lesser tolerance to evasion of this tax, a dynamic referred to as ‘competitive Table 10.4 The taxpayers who used the tax amnesty in 1936, according to the level of taxable income Annual taxable income (1000 CHF) (1) ≤2 2.1–4 4.1–6 6.1–8 8.1–10 10.1–15 15,1–20 20.1–30 30.1–40 40.1–50 >50

Number of taxpayers (1934) (2)

Number of taxpayers using the amnesty (1936) (3)

The proportion of taxpayers using the amnesty (%) (4)

156,167 106,685 39,115 14,329 6317 6031 2010 1646 608 357 680

2325 4627 5004 2719 1359 1617 636 491 229 98 238

1.5 4.3 12.8 19 21.5 26.8 31.6 29.8 37.7 27.5 35

Sources Geschäftsbericht des Regierungsrates an den Zürcherischen Kantonsrat 1937 , p. 85; Kantonale Staatssteuerstatistik 1934, 1939, pp. 22, 26, 97.

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undervaluations’ in the historiography on the property tax in the United States (Hindman 2010, 11, 39, 234–235). In this regard, contrary to the situation prevailing during World War I, Zurich was now on the side of the cantons with comparatively low tax evasion, and its taxpayers had to pay a relatively high share of federal taxes. This situation was considered intolerable by Zurich’s business circles, which found themselves at a disadvantage to their competitors in other cantons.22 But the capitalist circles were not alone. All political actors in Zurich complained about the differences between the cantons regarding the application of the federal crisis tax.23 This convergence derived from diverging goals, which shared, however, the need for a more homogenous application of federal taxes. For example, in 1938, Nobs explained to the board of the Socialist Party that given the risk of capital flight, the canton could not afford to tackle tax evasion strongly.24 In his perspective, the homogenisation of taxation throughout the federal territory was a prerequisite for any anti-evasion policy at the cantonal level. At the same time, several studies attempted to estimate the extent of tax evasion in Switzerland. Was this linked to the complaints, notably in Zurich? The hypothesis is probable, not least because the most striking study was done by Eugen Grossmann, a renowned professor in public finance at the University of Zurich and a former employee of the Zurich Finance Department. His estimates concluded that, on average, around half the wealth of private taxpayers was evading taxation in Switzerland in 1929–1932 (Grossmann 1935, 107–109; 1939). Grossmann’s results were called into question by some members of the Swiss Parliament and the Swiss Bankers’ Association. However, the real issue at stake in these criticisms was not the level of tax evasion, but the appropriateness of taking measures to tackle it (Honegger 1942, 15– 19, 122; Juvalta 2001, 31–33). At the same time, Grossmann’s results were coherent with other estimations and also had political support from, among others, the Socialist Party (for example, Steinemann 1938).

22 Vorstand Handelskammer, 29 November 1935, Archiv für Zeitgeschichte, Zurich, A.3.2.1.8. 23 StAZH, W II 41.39, Nr. 3, Demokratische Partei des Kantons Zürich. Pressedienst, 12 August 1938, StAZH, W II 41.39, Nr. 3; Munz (1944; 2, 22). 24 Geschäftsleitung der Sozialdemokratische Partei des Kantons Zürich, 10 April 1938, p. 7, SozA, Ar.27.10.22.

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In 1944, the Federal Tax Administration (FTA) published another estimate, limited to tax evasion on securities (Eidgenössische Steuerverwaltung 1944, 183–188). It concluded that about 30% of the wealth held in the form of securities had not been declared in 1940.25 However, this estimate was very conservative. Moreover, the new taxes introduced at the federal level in 1940 were accompanied by a general amnesty and introduced a strengthening of taxation procedures, thus lowering somewhat the extent of tax evasion. All things considered, the result of the FTA appears consistent with Grossmann’s estimates.26 To my knowledge, no studies were trying to estimate directly the differences in evasion between the cantons.27 However, it was clear to financial experts in Zurich that evasion no longer reached such a high level in their canton (for example, Klaus 1939, 331). To support this argument, they indicated that the share of Zurich in the tax revenues from the crisis tax, and its successor the national defence tax, introduced in 1940, was disproportionate (Higy 1938, 172; Biedermann 1948, 117). This share reached 25%, while Zurich represented 15–16% of the Swiss population and, according to later estimates, the canton’s share of national GDP during this period was around 18–19% (HSSO 2012, B.01a, Q.17a and Q.19). At the same time, several works—the most significant of which, written under Grossmann’s supervision, was the doctoral thesis of Fritz Honegger, who was to become president of the Handelskammer— described the major differences between the cantonal tax systems and the resulting inequalities regarding federal taxes (Honegger 1942). In this context, from the second half of the 1930s onwards, a struggle began between the cantons over the effects of evasion on the distribution of the federal government’s tax burden. This led, in 1944, to the introduction at the federal level of a mechanism for taxing income from securities at source—the ‘withholding tax’ (WT) (Juvalta 2001; Lurà 2015). This system was conceived by the Finance Minister of Zurich,

25 The FTA gave 23%, but this was computed including non-taxable assets, see Munz (1944, 14). 26 On Grossmann’s and the FTA’s estimates, as well as further estimates for 1945, see also Longchamp (2014, 112–117; Howald 2011). 27 An original indirect approach was to compare the number of taxpayers declaring more than 10,000 CHF annual income with the number of cars registered in each canton. The disparities were striking and were taken as a strong hint that taxpayers in Basel and Zurich were much better taxed (Schmid 1940, 146, and 183).

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Hans Streuli, a member of the business-friendly Radical Party, and introduced by Ernst Wetter, the Swiss Finance Minister, also a radical from Zurich, who had close ties to big business. This mechanism allowed the holders of securities to recover the money collected at source if they provided proof that these securities were declared. Thus, in cantons with relatively low rates of evasion, like Zurich, a significant part of the revenue from the WT could be recovered. Conversely, taxpayers residing in cantons with a higher level of evasion had to bear a relatively higher share of the WT. As a result, this reduced the tax disadvantage suffered by the Zurich business community. Furthermore, its implementation helped to reduce the pressure exerted by political forces, mainly the Socialist Party, who were advocating for stronger measures against evasion, in particular the lifting of banking secrecy (Tanner 1986, 212; Longchamp 2014, 141–145). The WT also had the paradoxical but deliberate consequence of not encouraging the FTA to fight evasion, since that would reduce the yield of this tax. This factor was anything but negligible: between 1945 and 1955, the WT represented an annual average of 20% of the Confederation’s revenues from direct taxation, and it would increase further to reach 35% for the period 1956–1975 (HSSO 2012, U.10). A further major goal for Streuli was to maintain strong fiscal federalism in Switzerland, and thus retain the competition between the cantons in the field of taxation.28 His proposal avoided, contrary to others that were made during that time, centralising much of the taxation procedure in the hands of the FTA, while the cantons retained full discretion in establishing their tax laws.

Conclusion Until the end of World War I, tax evasion was very high in Zurich. On average, at least half of taxable wealth and income was not taxed. In the interwar period in Zurich, evasion had been reduced but was still significant: 25–30% of taxable matter evaded taxation. In Switzerland as a whole during the interwar period, tax evasion on wealth averaged around 50%, before decreasing slightly during World War II. 28 Kommission für Beratung des Steueranpassungsgesetzes, 12 Mai 1944, p. 3, StAZH, M 14 g.41.9; for an analysis of the role and consequences of fiscal federalism and its benefits for capitalist circles, see Guex (1998, 101–128).

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Data on tax inventories and recovery taxes in Zurich from the 1890s to World War I show that wealthier taxpayers evaded their taxes more often. The results of the amnesty granted to Zurich taxpayers in 1936 showed similar results, but this time regarding income. In both cases, most of the tax revenue losses for the public coffers were due to evasion from the upper wealth and income classes, respectively. These results are coherent with other studies, albeit for other places and for more recent times (for example, Saez and Zucman 2019, Chapter 3). This article also shows how tax evasion can be instrumentalised by political actors according to objectives specific to the political, social, and economic context. The revision of the Zurich tax law in 1917 and the introduction of a withholding tax on the federal level in 1944 are two prime examples. In both cases, Zurich’s capitalist circles displayed their will to fight tax evasion, but it was, in fact, a means to achieve other goals: reducing tax rates in 1917; shifting federal taxes to taxpayers in other cantons during World War II; and both times preventing more stringent measures that would particularly affect them, which were advocated by other sectors of society, as well as strengthening the position of the canton of Zurich in the tax competition at federal and international levels. The issue of tax evasion was also systematically mobilised to criticise tax rates that were considered too high. The link between a high tax rate and strong tax resistance was presented almost as a natural phenomenon by business circles, and often in academic circles too.29 However, this link is far more complex (see, for example, Guex 1998, 64–73; Noël 2018, 10– 12). To take just one example: the rates were increased again in Zurich during the 1930s and World War II, yet the observed tax evasion showed rather a declining trend. To explain this, one should take into account the international context, the power relationship between social and political forces, the degree of rigour of the tax authorities, the penalties for tax evasion, etc.—in short, the broader historical context must be considered. Finally, tax evasion should be accounted for when using tax sources, particularly when quantitative series are used to analyse socio-economic developments. A prime example would be the Piketty-style studies on inequalities (Piketty 2013). As was pointed out long ago, for example by Meisel (1925, 57–60) and Steinmann (1938, 72–77), taking into account the magnitude and social distribution of tax evasion modifies greatly the 29 Examples for the time until World War I are given above (see Bullock 1910; LeroyBeaulieu 1906; Seligman 1914; Wolf 1897; Esslen 1910). For more recent examples, see Friedman (1976; Buchanan and Lee 1982).

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degree of social inequalities that can be measured. Given that the wealthy and high-income earners have been and still are the prime tax evaders, social inequalities have been and still are even more abysmal than is usually accounted for.

Bibliography Biedermann, Edwin. 1948. Die Steuerbelastung im Kanton Zürich. Zurich: JurisVerlag. Buchanan, James M., and Dwight R. Lee. 1982. Politics, Time, and the Laffer Curve. Journal of Political Economy 90 (4): 816–819. Bullock, Charles J. 1910. The General Property Tax in Switzerland. In State and Local Taxation: International Conference under the Auspices of the International Tax Association: Addresses and Proceedings (August 30 to September 2, 1910), ed. National Tax Association, 53–84. Norwood: Norwood Press. Ceni, Monique. 2008. Guerre, impôts fédéraux directs et fédéralisme d’exécution. In Kriegswirtschaft und Wirtschaftskriege, ed. Valentin Groebner, Sébastien Guex and Jakob Tanner, 177–195. Zurich: Chronos. Eidgenössische Steuerverwaltung. 1944. Über das Ausmass der Steuerhinterziehung bei Wirtschriften und Sparguthaben. Untersuchung auf Grund der Wehropferstatistik. Schweizerische Zeitschrift für Volkswirtschaft und Statistik: 183–188. Ernst, Heinrich. 1903. Die direkten Staatssteuern des Kantons Zürich im neunzehnten Jahrhundert. Winterthur: Ziegler. Esslen, Joseph. 1910. Die direkten Steuern im Kanton Zürich und ihre Reform. Zurich: Rascher & Co. Fehr, Aniko, and Sylvain Praz. 2023. “Exceptional” Tax Amnesties: a Common Swiss Way of Fighting Tax Fraud in the Twentieth Century. In Not Paying Taxes. Tax Evasion, Tax Avoidance and Tax Resistance in History. Ed. Korinna Schöhnhärl, Gisela Hürlimann and Dorothea Rohde, 168-184. Abingdon/New York: Routledge. Friedman, Milton. 1976. The Line We Dare not Cross. The Fragility of Freedom at 60 Percent. Encounter 47: 8–14. Greulich, Hermann. 1891. Das statistische Seminar in Zürich. Zeitschrift für schweizerische Statistik: 5–71. Grossmann, Eugen. 1935. Das Problem der Steuerlast mit besonderer Berücksichtigung der Schweiz. Zeitschrift für schweizerische Statistik und Volkswirtschaft: 83–109. Grossmann, Eugen. 1939. Die Finanzkraft der Schweiz. Zeitschrift für schweizerische Statistik und Volkswirtschaft: 1–12 and 133–159.

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Guex, Sébastien. 1993. La politique monétaire et financière de la Confédération suisse 1900–1920. Lausanne: Payot. Guex, Sébastien. 1998. L’argent de l’État. Parcours des finances publiques au XXe siècle. Lausanne: Réalités sociales. Guex, Sébastien. 2022. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review 96 (2): 353-372. Guldenmann, Walter. 1918. Das Steuereinschätzungsverfahren und seine Bedeutung für die Staats-und Gemeindefinanzen. Zurich: Orell Füssli. Hindman, Monty. 2010. The rise and fall of wealth taxation: An inquiry into the fiscal history of the American states. Ph.D. diss, University of Michigan. Honegger, Fritz. 1942. Vergleichende Betrachtungen über das Erhebungsverfahren bei den direkten Bundessteuern: ein Beitrag zur schweizerischen Steuerpolitik. Zurich: AG. Fachschriften. Howald, Stefan. 2011. “Eine ressentimentgeladene Einstellung provozieren”. Kurze Geschichte über Versuche, die einheimische Steuerhinterziehung in der Schweiz zu berechnen. In Richtig Steuern. Wie mit Steuern jährlich 25 Milliarden Franken an die Bevölkerung rückverteilt werden können, ed. Hans Baumann and Beat Ringger, 160–172. Zurich: edition 8. HSSO (Historical Statistics of Switzerland Online). 2012. Swiss Society for Economic and Social History. https://hsso.ch. Accessed 26 January 2022. Higy, Camille. 1938. Der Steuerausgleich zwischen Bund und Kantonen. In Die Schweiz. Ein nationales Jahrbuch 1939, ed. Neue Helvetische Gesellschaft, 168–180. Brugg: Neue Helvetische Gesellschaft. Juvalta, Steivan. 2001. “La création de l’impôt anticipé en Suisse en 1944”. Master’s thesis: University of Lausanne. Klaus, Emil. 1939. Die Bewegung der Steuerkapitalien im Kanton Zürich 1918– 1939. Zentralblatt für Staats- und Gemeindeverwaltung: 328–331. Leroy-Beaulieu, Paul. 1906 (7th ed.). Traité de la science des finances. 2 vols. Paris: Guillaumin et Cie/Felix Alcan. Longchamp, Olivier. 2014. La politique financière fédérale (1945–1958). Lausanne: Antipodes. Lurà, Filippo. 2015. L’impôt anticipé. Ses origines, sa genèse et sa nature. Comparaison avec d’autres systèmes de retenue à la source et de communication de renseignements. Geneva/Zurich/Basel: Schulthess. Meisel, Franz. 1925. Britische und deutsche Einkommensteuer. Ihre Moral und ihre Technik. Tübingen: J.C.B. Mohr (P. Siebeck). Müller, Philippe. 2010. La Suisse en crise (1929–1936). Les politiques monétaire, financière, économique et sociale de la Confédération helvétique. Lausanne: Antipodes. Munz, Hans. 1944. Steuerhinterziehung – ein Massenphänomen in der Schweiz. Zurich: Landesring der Unabhängigen.

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Noël, Yves. 2018. La fraude fiscale. Lausanne: Presses polytechniques et universitaires romandes. Piketty, Thomas. 2013. Le capital au XXIe siècle. Paris: Seuil. Praz, Sylvain. 2016. “Plus d’argent avec moins d’impôts? La loi fiscale du canton de Zurich de 1917”. Master’s thesis : University of Lausanne. Richard, Emil. 1901. Vorschläge zur Revision des Staatssteuergesetzes des Kantons Zürich. Zurich: Druckerei der Neuen Zürcher Zeitung. Richard, Emil. 1902. Zur Steuerreform im Kanton Zürich. Zweite Eingabe der Zürcher Handelskammer an den h. Kantonsrat des Kantons Zürich. Zurich: Druckerei der Neuen Zürcher Zeitung. Saez, Emmanuel, Gabriel Zucman. 2019. The Triumph of Injustice. How the Rich Dodge Taxes and How to Make them Pay. New York: W. W. Norton & Company. Schanz, Georg. 1890. Die Steuern der Schweiz in ihrer Entwicklung seit Beginn des 19. Jahrhunderts. 5 vols. Stuttgart: J.G. Cotta. Schmid, Karl Emanuel. 1940. Zum Problem der allgemeinen Einkommensteuer in der Schweiz. Zurich: Müller Werder & Co. Seligman, Edwin R. 1914 (2nd ed.). The Income Tax: A Study of the History, Theory, and Practice of Income Taxation at Home and Abroad. New York: Macmillan. Steinemann, Eugen. 1938. Der Reichtum der Schweiz und seine Verteilung. Gewerschaftliche Rundschau Für Die Schweiz 30 (3): 72–77. Tanner, Jakob. 1986. Bundeshaushalt, Währung und Kriegswirtschaft. Eine finanzsoziologische Analyse der Schweiz zwischen 1938 und 1953. Zurich: Limmat Verlag. Vademecum für Referenten. kantonale Volksabstimmung vom 25. November 1917 über den Entwurf zu einem neuen Steuergesetz. 1917. Zurich. Walder, Jakob. 1895. Steuer-Defraudation. [Winterthur]: [Landboten]. Wolf, Julius. 1897. Die Steuerreform im Kanton Zürich. Zurich: Albert Raustein.

CHAPTER 11

War Profits and Tax Evasion: Italian Fiscal Policies in the First World War and After the War, 1915–1924 Fabio Ecca

The First World War caught the Italian economy unprepared. In this regard, it can be argued that, despite having entered the war only in 1915, Italy was initially unable to sustain a modern war for a long time. Italian industries were few and small, the army was almost completely devoid of modern weapons (e.g. airplanes, machine guns, etc.), and food shortages threatened soldiers and citizens (Caracciolo 1969, 187–240; Einaudi 1933). These problems were solved by General Alfredo Dallolio (Assenza 2010) who, when in charge of the Weapons and Ammunition Ministry, was able to arm and support the Italian army. During WWI he spent at least one thousand billion lire and entered into thousands of contracts with private industries to purchase weapons, ammunition, and provisions.

F. Ecca (B) Roma Tre University, Rome, Italy e-mail: [email protected]

223 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_11

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Speed and quantity were the two keywords that characterised the relationship between the Italian state and private industries during WWI. Many industries, however, had taken advantage of these extraordinary conditions to obtain huge and illicit profits. For example, industries had often raised prices, delayed deliveries, sold the same material to several clients, and delivered materials that differed from those agreed (Ecca 2017). These profits caused scandal amongst public opinion, so much so that the well-known socialist designer Giuseppe Scalarini represented the industrialists as ‘war sharks’ during WWI and the subsequent postwar period (Ecca 2020a, b, 73–91). After the end of WWI, the Italian state set up its Parliamentary Commission of Inquiry on War Expenses (henceforth the Commission) to identify and recover war profits (Mazzonis 2002, 3–231). The Commission’s investigations were carried out from 1920 to 1922 and made it possible to identify numerous war profits and, consequently, enabled the state to recover what was escaped and eluded by the ‘war sharks’ (Ecca 2020a, b, bis, 91–107). However, the Commission was not the only system devised by the Italian state to recover war profits. In fact, starting from 1915, in the Italian tax system there were taxes on war profits. These comprised a series of measures analysed after the war by the well-known economist Luigi Einaudi in the volume La guerra e il sistema tributario italiano (Einaudi 1927). This book, therefore, offers the possibility of understanding not only the Italian tax system, but also the tax on war profits and the numerous tax evasion and/or avoidance practices adopted between 1915 and 1924. The tax on war profits was a tax which, although present in almost all the warring countries, in the Italian case presents peculiarities that make it particularly interesting.

The Tax on War Profits Between 1915 and 1924 the Italian state had tried to tax war profits through three different taxes. The names of these three taxes were: ‘Tax on War Dependent Profits’, ‘Tax on War Capital Increases’ and ‘Avocation War Profits’. According to Luigi Einaudi, however, these three taxes ‘can […] be considered as a single tax, gradually tightened up and carried up to the maximum rate of one hundred percent, that is, until the complete confiscation of income’ (Einaudi 1927, 131). The war profit tax was part of a broader war tax policy that included the creation of

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new taxes, the reshaping of previous taxes, and an overall increase in the tax burden (Einaudi 1927, 2–38). It is useful to underline that the tax on war profits also had numerous objectives: to part-finance military spending, satisfy public opinion, and economically and politically control the transformations of Italian society. After necessarily identifying this premise, it is possible to start analysing the tax on war profits and its evasion. The tax on war profits was triggered in a tax system characterised by numerous problems that had remained unsolved since the so-called Giolitti period (1903–1914). In fact, before the war, the Italian tax system was devoid of elasticity and the principle of progressivity (Einaudi 1927, 2–38, 77). For example, capital tax was still calculated only on the basis of the share capital declared by a company. This had allowed many companies to declare lower-than-real company capital and thus to evade capital tax. This also happened with land tax: thanks to the lack of land registry reform and the weakness of the staff, the landowners often managed to report a cadastral income lower than the real one. Many owners of land and buildings were therefore able to evade the tax authorities. The Italian tax system during WWI inherited these problems. In fact, the Royal Decree no. 1648 of 21 November 1915 instituted the tax on war profits as an extraordinary tax on assets. This law identified war profits as ‘extraordinary profits due to war contingencies’.1 The definition of extraordinary, however, was a subjective concept, as a profit could be considered ordinary by some and extraordinary by others. The law 1648/1915 identified war profits as those profits higher than 8% of the share capital declared in 1914 (the last year of peace for Italy). Simplifying this, it is possible to argue that profits of less than 8% were recognised by law as ordinary, and therefore taxable according to the usual regulations, while profits equal to or greater than 8% had to be subject to the tax on war profits.2 The law also established the categories to which the law 1648/1915 was applied—traders, industrialists, and brokers—and subjected them to two different progressive regimes.3 The 1 Royal Decree Law no. 1648 item 1, 21 November 1915, Gazzetta Ufficiale del Regno d’Italia (GURI), no. 287 of 24 November 1915. 2 Royal Decree Law no. 1648 annex B, item 1, 21 November 1915, GURI , no. 287 of 24 November 1915. 3 It is possible to summarise the two different regimes in this way. Traders and industrialists had to pay 10% on the share of the profit achieved above 8% and up to 10% of the

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law 1648/1915 also introduced a tax-free limit for income not exceeding 2500 lire and provided two important definitions: ordinary income was the average of the income ascertained in the two-year period 1913– 1914,4 while the capital invested was the capital actually employed in the production of income, as recorded in deeds and trade books. Finally, the law identified the Tax Agency (the Italian name is Agenzia delle Entrate) as the public institution responsible for ascertaining, through the examination of tax returns, the alleged war income and the related methods of possible opposition.5 The tax did not affect every person’s increases in wealth, but only those who could not prove that their increase in income was not due to the war. Subsequent laws emulated what was established by the law 1648/1915. There were, however, some substantial differences: the Lieutenancy Decree no. 1090 of 31 August 1916 increased the rates, almost doubling them,6 and created the new tax category of tenants of rustic land, i.e. the owners of land intended for agricultural production. This invested capital; 15% on the share of the profit above 10%, and up to 15% of the invested capital; 20% on the share of the profit above 15% and up to 20% of the invested capital; 30% on the share of the profit exceeding 20%. For brokers, however, it was established that they had to pay 5% of the profit on the excess of more than one tenth, up to five tenths of ordinary income; 10% of the profit on the excess from another five tenths, up to 10 tenths of ordinary income; 15% of the profit on the excess of more than 10 tenths, up to 20 tenths of ordinary income; 20% of the profit on the excess from over 20 tenths, up to 30 tenths of the ordinary income; 30% of the profit on the excess from over 30 tenths. 4 The decision to take into consideration the two-year period 1913–1914 is due to the fact that the Italian state recognised the gain achieved in the last two years of peace as ordinary profit, therefore it was not affected by the tax on war profit. 5 All this information is stored in Annex B of Law no. 1648/1915, which appears to be particularly significant because it indicated in detail the methods of application of the same law. 6 In this provision, the two categories already provided for in law 1648/1915 remained. Law 1090/1916 provided that traders and industrialists paid, as a tax on war profits, 12% on the share of the profit achieved above 8% and up to 10% of the invested capital; 18% on the share of the profit above 10% and up to 15% of the invested capital; 24% on the share of the profit above 15% and up to 20% of the invested capital; 35% on the share of the profit exceeding 20%. For brokers, however, it was established that they had to pay 5% of the profit on the excess of more than one tenth, up to five tenths of ordinary income; 12% of the profit on the excess from another five tenths, up to 10 tenths of ordinary income; 17% of the profit on the excess of more than 10 tenths, up to 20 tenths of ordinary income; 24% of the profit on the excess from over 20 tenths, up to 30 tenths of ordinary income; 35% of the profit on the excess from over 30 tenths.

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Lieutenancy Decree also established that the tax on war profits had to be accompanied by a tax on the increase of assets deriving from the war. This last tax thus became a sort of additional tax on war profits.7 The tax on the increase of assets deriving from the war was established with the Royal Decree no. 2164, of November 24 1919, subsequently amended by Law no. 494 of 22 April 1920.8 In those same months, the growing pressure of public opinion against war profiteers had led Prime Minister Giovanni Giolitti to also promote further measures. In fact, he established the Parliamentary Commission of Inquiry on War Expenses9 and promulgated Law no. 1298 of 24 September 1920, which established the return to the state of all the profits already affected by the previous taxes.10 With this provision, the Italian state established that all profits made during WWI were seized and made public.

The Main Tax Evasion Practices It is possible to understand the main tax evasion practices only if it is taken into account that all the measures concerning the tax on war profits followed a truly exceptional legal principle: retroactivity of application.11 This tax on war profits was in fact always calculated from the starting point of 1 August 1914. The choice of this date was not accidental, but was linked to the beginning of WWI (28 July 1914). This makes it clear that it was the entire Italian legislative formulation relating to the tax on war profits that facilitated tax evasion. An illustrative case in this regard is the same decree, no. 1648 of 21 November 1915, which created the tax on war profits. As we have seen, this law established that the tax on war profits exclusively concerned 7 Lieutenancy Decree no. 1090, 31 August 1916. The law was also published in 1916. Provvedimenti finanziari per l’erario dello Stato e dei comuni: Decreto Luogotenenziale 31 agosto 1916, n. 1090, Rome: Tipografia delle Martellate. 8 Royal Decree no. 2164, 24 November 1919, in GURI , no. 279 of 26 November 1919. Law no. 494, 22 April 1920 in GURI , no. 103 of 1 May 1920. 9 Law no. 999, 18 July 1920, in GURI , no. 172 of 22 July 1920. 10 Law no. 1298, 24 September 1920, in GURI , no. 229 of 28 September 1920. 11 It should be emphasised that the introduction of the legal principle of retroactivity

was an exceptional case in the history of Italian law. Never before had the Kingdom of Italy instituted retroactive laws.

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traders, industrialists, and intermediaries.12 In order to evade the war profit tax, many owners had simply transformed the social nature of their company. The same law, no. 1648/1915, also defined war profits as ‘the new income made as a result of the European war by traders, industrialists, and intermediaries, as well as income of the same nature made in excess of ordinary income’.13 Translated from the Italian bureaucratic language, this meant that the war profit could be a new source of income or an increase in previous income, and that it must have occurred as a result of the war. It should be emphasised that the very phrase ‘as a result of the European war’ nevertheless caused numerous disputes between the state and taxpayers. The taxpayers in fact made every effort, even illicit ones, to exclude any link between the war and the profits made. They often forced the interpretation of the law, while the Italian state tried to transform the relationship between war and profit into a mere chronological relationship: before and after the war. The Italian state clarified the interpretation of the phrase ‘as a result of the European war’ by issuing the Lieutenancy Decree no. 1893 of 23 December 1915. This law stated that all increases in production, trade and price that occurred after 1 August 1914 were to be assumed as war profits.14 Subsequently, furthermore, the circular of the Ministry of the Treasury, no. 7715 of 11 August 1917, specified that all new and greater earnings made in Italy as a result of the war were to be taxed as war profits.15 It is also necessary to point out that all the different formulations of the tax on war profits hinged on two fundamental concepts: ordinary income and invested capital. In order to understand the main tax evasion and avoidance practices in Italy, it is necessary to analyse these two concepts. Ordinary income was the income definitively ascertained for the purposes of collecting the tax on movable wealth in the two-year period 1913–1914. The subsequent Lieutenancy Decree no. 145 of 18 January 1917 also specified that in the case of a capital increase of a company or 12 Royal Decree Law no. 1648 annex B, item 1, 21 November 1915, in GURI , no. 287 of 24 November 1915. 13 Law Decree no. 1648 article 1, 21 November 1915, in GURI, no. 287 of 24 November 1915. 14 See Lieutenancy Decree no. 1893, 23 December 1915. 15 See the circular of the Ministry of Finance no. 7715, 11 August 1917, Archivio

Centrale dello Stato (ACS), Rome, Ministero delle Finanze-Direzione Generale Imposte dirette, envelope 1.

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company pre-existing on 1 August 1914, the ordinary income had to be valued at a percentage equal to that calculated for the previous capital.16 Thus it transpired that a company that before 1 August 1914 already had continuous sources of income exceeding 8% of the share capital was able to have its war profits made during WWI recognised as ordinary income. Therefore, they did not pay the tax on war profits. This was made possible by the rigidity of the tax legislation, which did not take into account that the conditions of individual taxpayers were very different from each other. In fact, the companies that had managed to enter into contracts for war supplies for the so-called ‘Italian-Turkish war’, fought between 1911 and 1912 (Labanca 2011), had almost always reported incomes exceeding 8% of the share capital in the following two years. Conversely, the companies that had not entered into war contracts in 1911–1912 had not achieved incomes exceeding 8% in the two-year period 1913–1914. This meant that companies that were created after the Italian-Turkish war, or that had not been involved in it, were forced to pay a higher tax on war profits than the war supply companies in 1911–1912, even for the same profit during WWI. This is also the reason why during WWI, many companies supplying war material in 1911–1912 were bought, and at a higher price than their real value. Their purchase and the consequent merger in fact allowed a substantial increase in the ordinary income of 1913–1914 and, consequently, a lower taxable amount relative to the tax on war profits.17 The concept of ordinary income is also important for understanding another tax evasion strategy. Before WWI, the main tax on ordinary income was the tax on mobile wealth. This tax had often been evaded by declaring ordinary incomes much lower than that which had actually been earned. As a result, taxpayers who reported lower-than-real ordinary income before WWI were forced to pay a higher tax on war profits than they would have had to pay if it had been based on the profits they actually made during WWI. In order to get out of this problem, taxpayers therefore decided during the war to report themselves as evaders of the tax on mobile wealth in the period prior to the conflict (Einaudi 1927, 16 See Lieutenancy Decree no. 145, 18 January 1917. 17 As part of the analysis of over 2000 contracts signed by the Italian state with private

entrepreneurs during WWI, it was noted that at least 10% of Italian companies had changed ownership between 1915 and 1918. On closer analysis, it was found that in most cases, these acquisitions had taken place at prices much higher than the value of the company (Ecca 2017, 85–90).

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140–141). Not surprisingly, the Lieutenancy Decree no. 654 of 9 May 1918 established that for the financial years of 1918, 1919, and the first half of 1920, the taxpayer had the right to prove that their actual income before WWI had been different, and greater than the income ascertained in relation to their mobile wealth. This provision created an important novelty, because it created two different periods of application of the tax on war profits. The first period included the period 1 August 1914–31 December 1917 and the second period was the period between 1 January 1918 and the day of self-reporting of the taxpayer.18 This means that a trader, industrialist, or broker who made war profits both during the First World War and afterwards had to pay according to two different laws. As regards the war profits obtained between 1915 and 1918, they had to pay according to what was established by the law 1648 of 1915 and its subsequent amendments, while for the war profits obtained after 1918 it had to apply the Lieutenant Decree no. 654 of 1918. As already mentioned, the other fundamental element for the war profit tax was the concept of invested capital. The Royal Decree no. 1643 of 21 November 1915 defined the invested capital as that necessary for the production of income,19 while another law promulgated the same year, the Royal Decree no. 1648 of 21 November 1915, did not provide for any deductions and/or exemptions, with the exception of considering the write-downs and provisions for the machinery necessary for war supplies as deductible liabilities.20 However, subsequent legislation gradually eliminated this initial rigidity by introducing numerous exemptions and deductions that were only abolished with the law of 24

18 See Lieutenancy Decree no. 654, 9 May 1918, in GURI , no. 123 of 12 May 1918. 19 The amounts obtained with a mortgage loan were also initially included in the capital

invested. The pressing requests of the industrialists had, however, convinced the Italian state to modify the initial wording of the law and to exclude from the invested capital the sums borrowed and, subsequently, also the debt securities, the shares, and the bonds owned by the taxpayers. In fact, it was common practice for a company or a taxpayer to invest part of their capital in treasury bills or public debt securities in order to have them available and to invest them as needed. In this regard, there was an interesting phenomenon: whenever the rate of tax on war profits increased, the capital invested also increased. This had forced the legislator to issue Decree no. 123 of 7 February 1916, which prohibited joint-stock companies from distributing dividends greater than pre-war dividends to shareholders, i.e. 8% on the nominal capital and 10% for new companies. 20 See Royal Decree no. 1648, 21 November 1915, in GURI , no. 287 of 24 November 1915.

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November 1919, no. 2164. It is possible to argue that every deduction and exemption had been a harbinger of tax evasion. For example, one of the most important deductions was related to the possibility for the small industrialist to deduct the wages of their spouse and children. It is clear, however, that this had often made it possible to illegally subtract a substantial part of the taxable amount from the tax on war profits through a false declaration of employment of one’s family members. The main deduction allowed was, however, that relating to the devaluation and depreciation of the special plants built for the production of war supplies. It was a measure conceived to solve some of the numerous problems of the Italian production system during WWI. Among these problems were the high management costs due to the inexperience of the workforce, the high cost of raw materials and fuels, their incorrect use, and their wear and tear. These problems contributed, not by chance, in a decisive way to the sudden devaluation of the same plants. This is how a plant hypothetically costing one million lire during the war was generally worth less than 80,000 lire after the war. Furthermore, it should be noted that many plants had large dimensions, which made their transformation into factories for peace production particularly complex and expensive (Ecca 2017, 131–175). However, the application of the deduction of the devaluation and depreciation of special plants built for the production of war supplies risked cancelling the entire tax base of the tax on war profits. This is why the Lieutenancy Decree no. 145, of 18 January 1917, was adopted. This provision distinguished the deduction by way of depreciation into two parts: the part relating to the premium paid due to the state of war and the value of the plant at the end of the war, which was estimated at 20% of its initial cost. This 20% was considered by the Italian treasury to be capital not subject to exceptional deterioration.21 It is evident that this was a particularly favourable system for taxpayers: assuming the total cost of a plant equal to 100 and the cost of the same plant before the WWI at 30, all the difference between 30 and 100 could be deducted from the profits obtained in the war period. The state also assumed that the value of the plant after the war had further decreased

21 See Lieutenancy Decree no. 145, 18 January 1917, in GURI , no. 18 of 21 January 1917.

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and was equal to 20. This was therefore the amount that the Italian state allowed the entrepreneur to amortise.22 It is clear that the purpose of the deductions was to make the rate of the tax on war profits appear high to satisfy public opinion and, at the same time, to mitigate the real burden of taxpayers as much as possible. Not surprisingly, with the promulgation of the law of 24 November 1919, no. 2164, the Italian state decided to extend the right to deduct taxes as much as possible. It therefore established that any tax, whether it was inherent in the production of income or not, would decrease the amount of profit, consequently leaving less scope for the confiscation order.23 Similarly, all the more or less voluntary disbursements that taxpayers had been called to make during the war were considered deductible, with the sole constraint of them being of a higher amount than those disbursed during the period of peace.

The Assessment of Income and the Collection of the Tax The tax on war profits had induced the Italian state to introduce important innovations in the assessment of income and in the collection of taxes. In fact, it is no coincidence that Luigi Einaudi asserted that ‘the tax on war profits must undoubtedly be credited with having reacted against the weak method that was used before the war in assessing income from movable assets, and which meant that they kept themselves considerably below reality’ (Einaudi 1927, 207). The Royal Decree no. 1039 of 6 August 1916 sanctioned the right of tax administrations to request the display of the registers of any taxpayer and the right to proceed with

22 The Decree no. 2164, 24 November 1919, only partially changed the depreciation system because it instituted the tax on increases in assets, also intervening in the right of depreciation of plants not intended directly for war supplies and, in article 28, restricted the parameters of deduction of the plants. 23 See the regulation of 17 March 1921, which established that all taxes due to the state and other public companies had to be deducted from net income (Einaudi 1927, 206).

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their inspection.24 In the event of the taxpayer’s refusal, a penalty of 200 lire was envisaged,25 in addition to the payment of the tax and a surcharge equal to one third of the ascertained tax.26 This principle was subsequently strengthened by Article 17 of the Lieutenancy Decree no. 971 of June 14, 1917.27 Furthermore, the Royal Decree no. 2164 of 24 November 1919 instituted, probably more to satisfy public opinion than to ascertain income, the oath. Although voluntary, the oath made it possible to ascribe the crime of tax evasion both in the criminal code— false oath—and in the civil code (subtraction from the state).28 Finally, Law no. 1298 of 24 September 1920 intervened in the assessment procedures. This provision in fact eliminated the oath but prevented those who did not allow the inspection of the accounting books, registers, and documents from presenting appeals against any measures administered.29 The strict rules that served to guarantee the state against attempts by taxpayers not to pay the tax levied against them had also aroused great clamour. The first operative decree in this regard was the Lieutenancy Decree no. 1039 of 6 August 1916, which sanctioned joint and several liability for those who were transferring their company, even when the transfer was prior to registration in the tax roll.30 This rule appeared to be necessary to counter false sales. The law, in fact, recognised as a transferee anyone who continued to manage a company, even if it was formally owned by another person. As for limited companies, in order to avoid 24 It is important to underline that this was in fact a first step towards the abolition of

banking secrecy in Italy. However, this fact must be ascribed to the exceptional contingencies imposed by WWI and not to the will of the Italian government to eliminate banking secrecy forever. 25 It should be emphasised that the fine of 200 lire was high, considering that the daily salary of a worker fluctuated between one and two lire. However, this was not a prohibitive amount for traders, industrialists, and brokers. 26 See Royal Decree no. 1039, 6 August 1916, in GURI , no. 166 of 8 August 1916. 27 See Lieutenancy Decree no. 971, 14 June 1917, in GURI , no. 161 of 17 June

1917. 28 See Royal Decree no. 2164, 24 November 1919, in GURI , no. 279 of 26 November

1919. 29 See Law no. 1298, 24 September 1920. The courts therefore had to issue their decisions on the basis of the presumptive criteria that emerged from the assessment operations. 30 See Lieutenancy Decree no. 1039, 6 August 1916, in GURI , no. 166 of 8 August 1916.

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the danger of their disappearance following liquidation, the Lieutenancy Decree no. 1568 of 19 November 1916 established that the directors of anonymous and joint-stock companies were jointly and severally liable for the tax, whatever the time of the assessment or the registration in the role.31 However, the most draconian rule was probably that relating to the arrears and insolvency of taxpayers. The Lieutenancy Decree no. 930 of 13 May 1917 had in fact introduced two important innovations: it authorised the tax administration to make public even a single nonpayment, and authorised the debt collector to immediately proceed with the seizure of each item of property of the debtor.32 The latter provision was completed by the Lieutenancy Decree no. 1562 of 1 October 1917, which authorised the immediate transmission to the Revenue Agency of the complete list of the personal and real estate assets of the defaulter. It also established that from the date of notification of the notice of default, the taxpayer could no longer alienate either the assets or the fruits of the assets, because they were legally seized.33 In short, the Decree no. 1562/1917 authorised the tax administration to fill extraordinary roles on the basis of simple notices of assessment. Finally, Article 4 of the Lieutenancy Decree no. 1562 of 1 October 1917 granted to the debt collector the faculty to declare the defaulting taxpayer bankrupt. In fact, it stipulated that anyone enrolled in the war profits tax rolls could be declared bankrupt. In this way, the juridical figure of fiscal bankruptcy arose for the first time in Italy. In the case of declaration of tax bankruptcy, taxpayers could only, after having satisfied the tax debt, go to the judicial authority to obtain compensation for damages.34

31 See Lieutenancy Decree no. 1568, 19 November 1916, in GURI , no. 194 of 22 November 1916. 32 See Lieutenancy Decree no. 930, 13 May 1917, in GURI , no. 148 of 16 May 1917. 33 See Lieutenancy Decree no. 1562, 1 October 1917, in GURI , no. 180 of 4 October

1917. 34 The instrument of fiscal bankruptcy was not used for mere threatening purposes. From 1 October 1917 to 31 December 1922 there were 837 tax bankruptcies in Italy, of which 119 were in Naples, 43 in Milan, 42 in Rome, 36 in Palermo and 26 for both Genoa and Livorno (Einaudi 1927, 221).

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The Payment of the Tax and Its Vision The efforts made by the Italian state to ensure the payment of tax on war profits or the penalties for its evasion were enormous. However, such efforts had numerous problems. For example, the confiscation laws started from the wrong assumption that taxpayers or tax evaders always had cash at their disposal. However, intermediaries and suppliers often had no assets, neither real estate nor movable, and for this reason they could not undergo seizures, forced sales, or bankruptcy declarations. In fact, the recovery of the tax on war profits was concentrated solely and exclusively on the owners of industries and commercial companies. However, they faced another problem: how could they convert their material possessions into the money needed to pay the war profit tax or redeem the confiscated assets? It was not possible to give an unambiguous answer to this question. However, the fact remains that war profits were often made in the form of balance sheet balances, that is, they were not readily available to the taxpayer. In this regard, it is possible to hypothesise that most of the war profits made were invested before the payment of the tax in new factories, activities, goods and buildings, precisely to evade the tax on war profits. In any case, the overall results of the war profits tax can be summarised in the diagram below, which includes the financial year 1923–1924: (Table 11.1) Table 11.1 Summary diagram of the revenue from taxes on war profits Years

Tax on war-dependent profits (in lire at nominal value)

Tax on capital increases (in lire at nominal value)

Tax on all war profits (in lire at nominal value)

Total (in lire at nominal value)

1916–1917 1917–1918 1918–1919 1919–1920 1920–1921 1921–1922 1922–1923 1923–1924 Total

108,227,026 451,634,548 805,831,142 982,382,152 1,459,050,930 1,245,950,867 778,496,480 518,923,659 6,350,496,804

– – – 64,624,466 555,182,821 – – – 619,807,287

– – – – – 489,677,883 189,242,233 148,730,200 827,650,316

108,227,026 451,634,548 805,831,142 1,047,006,618 2,014,233,751 1,735,628,750 967,738,713 667,653,859 7,797,954,407

Source Reworked: Einaudi, Luigi. 1927. La guerra e il sistema tributario italiano, Bari: Laterza, 227

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However, it should be remembered that the value of the lira decreased every year, therefore this method does not allow for an effective comparison between the different years. Einaudi therefore decided to apply the reduction coefficients of the average rate of the lira (Table 11.2). These data show that the tax on war profits earned the state a sum practically equal to that relating to ordinary income in the last year of peace. This confirms that from a fiscal point of view, taxation on war profits responded more to a political need of the time than to a real economic need. It is not possible to understand how much the evasion and/or avoidance of the tax on war profits was, but it had to be an amount almost similar to that actually collected. The scarce documentation available on the subject suggests this, given that the Fascist government had never wanted to have any investigation conducted in this regard, while the previous Liberal governments had conceived the tax on war profits exclusively as a political tool, not an economic one. This lack of documentation has led to the realisation that neither Einaudi nor other authors have ever been able to estimate how much the evasion of the tax on war profits actually amounted to.

Table 11.2 Summary diagram of the application of the reduction coefficients for comparability between the different years Years

1916–1917 1917–1918 1918–1919 1919–1920 1920–1921 1921–1922 1922–1923 1923–1924

Total product of the tax levy on war profits (in millions of lire at nominal value)

Average rate of the lira in cents of lira-gold

Total product of the tax levy on war profits (in millions of lire at gold-value)

108.2 451.6 805.8 1047 2014.2 1735.6 967.7 667.6

75 60 73 34 22 24 24 23

81.1 271 588.2 356 443.1 416.5 232.2 153.5 2541.6

Source reworked: Einaudi, Luigi. 1927. La guerra e il sistema tributario italiano, Bari: Laterza, 228

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Conclusions The lack of documentation relating to the evasion of war profits does not exclude the possibility of drawing conclusions on this issue. The number of laws and measures adopted in relation to the tax on war profits and countering its evasion and/or avoidance suggests that not paying this tax was a widespread practice. On the other hand, as we have tried to demonstrate, the measures adopted had numerous dysfunctions in their implementation. The Italian tax system of the First World War, in fact, had inherited many problems from the pre-war period, including rigidity, the lack of an overall vision, the lack of time to implement the measures, and the indeterminacy of the implementing regulations. The First World War had aggravated these problems, given the exponential increase in the taxable amount required and the simultaneous need to protect the industrial, commercial, and brokerage activities engaged in the war effort. It is therefore conceivable that the need to have quickly and in large quantities the weapons and ammunition necessary for the army and navy had been considered more relevant than the opportunity to tax war profits. Indeed, it can be argued that the evasion of the war profit tax was probably considered a necessary evil for eventual victory. It is no coincidence that many of the measures adopted had political and propaganda purposes and were not related to the recovery of money. Furthermore, the unstable postwar period had not contributed to solving these problems, given that the fragmentation of the solutions adopted did not allow the continuity of operations necessary to recover what was escaped. These are solutions which, however, after Mussolini’s seizure of power, were definitively abandoned, probably to protect those who had financed the Fascist regime. During the Fascist regime, in fact, the tax on war profits was considerably weakened. The war profit tax was also characterised by a structural problem, which remained unsolved during the entire period of 1915–1924. In fact, the Italian legislator had considered the excess over the income obtained before the war as the basis of the tax. He, therefore, assumed that all income up to 8% of the invested capital was to be considered as peacetime income, even in times of war. It followed that if in pre-war times the income obtained had already exceeded 8% of the invested capital, a gain was considered war profit only when it exceeded 8% of the invested capital. In short, it can be argued that between 1915 and 1924 the Italian state had major difficulties in distinguishing war income from ordinary

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income. The Italian state had prepared a system that, in fact, did not hinder the evasion of the tax on war profits. This was due to the fact that, as already pointed out, the war profit tax was conceived as a political propaganda tool to satisfy public opinion eager to hit war sharks, and not as a fiscal tool to recover extraordinary profits achieved because of the war.

Bibliography Assenza, Antonio. 2010. Il generale Alfredo Dallolio. La Mobilitazione Industriale dal 1915 al 1939. Rome: Ufficio storico dell’Esercito Italiano. Caracciolo, Alberto. 1969. Crescita e trasformazione della grande industria durante la Prima guerra mondiale. In Lo sviluppo economico in Italia. Storia dell’economia italiana negli ultimi cento anni, ed. Giorgio Fuà, Third volume, 187–240. Milan: FrancoAngeli. Ecca, Fabio. 2017. Lucri di guerra. Le forniture di armi e munizioni e i “pescecani industriali” in Italia (1914–1922). Rome: Viella. Ecca, Fabio. 2020a. Penna, matita e reclusione. Le esperienze di Giacinto Menotti Serrati e Giuseppe Scalarini. In Stampa coatta. Giornalismo e pratiche di scrittura in regime di detenzione, confino e internamento, ed. Anthony Santilli and Enrico Serventi Longhi, 73–91. Rome: All Around. Ecca, Fabio. 2020b. bis. “Pescecanismo”: The Italian State’s crisis in the face of the scandal of war profits (1915–1919). Memoria e Ricerca, Year XXVIII 63: 91–107. Einaudi, Luigi. 1927. La guerra e il sistema tributario italiano. Bari: Laterza. Einaudi, Luigi. 1933. La condotta economica e gli effetti sociali della guerra italiana. Bari: Laterza. Labanca, Nicola. 2011. La guerra italiana per la Libia 1911–1931. Bologna: il Mulino. Mazzonis, Filippo. 2002. Un dramma borghese. Storia della Commissione parlamentare d’inchiesta per le spese di guerra. In L’Inchiesta parlamentare sulle spese di guerra (1920–1923), ed. Carlo Crocella and Filippo Mazzonis, 3–231. Rome: Camera dei deputati.

CHAPTER 12

Tax Compliance in a Crisis: Evidence from the Great Depression, 1929–1936 Sacha Dray

Introduction What factors are associated with a refusal to pay taxes? Albeit important in academic and policy debates, this question remains difficult to answer (Slemrod and Yitzhaki 2002). The academic literature on this has focused on explaining individual decisions to avoid or evade taxes, but it remains difficult to know what fuels widespread movements of protests and a refusal to pay taxes. First, large-scale protest movements counseling tax

This paper was prepared for the conference ‘Tax Evasion or Avoidance and Tax Havens, from the Nineteenth Century to the Present Day’ held by the University of Lausanne. I would like to thank Hadrien Buclin, Neil Forbes, Thibaud Giddey, Guillaume Guex, Sébastien Guex, Camille Landais, Vanessa Ogle, and seminar participants for their comments and suggestions. S. Dray (B) London School of Economics, London, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature 239 Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_12

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evasion are rare, which makes it difficult to study them systematically. Second, the paucity of data to quantify the extent of tax revolts, evasion, or avoidance has limited the empirical investigation of this question. This paper explores factors associated with non-compliance with property taxation during the Great Depression, using a panel of data of 52 US cities between 1929 and 1936. We exploit the sudden and spatially contrasted increased property tax delinquency during 1929–1933, before it returned to pre-Depression levels. Tax delinquency refers to the share of unpaid taxes by the end of a fiscal year, and captures both late and nonpayment of property taxes.1 By exploring a relatively dramatic episode in tax history, we can shed light on factors associated with higher levels of non-compliance, and the extent to which a short-lived but consequential increase in tax non-compliance had persistent consequences on the revenue mobilization of cities. We present two main findings. First, we find evidence that tax noncompliance was associated with worse economic conditions, inability to pay, and the presence of elections. Higher property tax delinquency rates were associated with a lower number of housing permits, a lower median income, and the presence of mayoral elections. We find no evidence of an association between tax non-compliance and either the burden of taxation (the property tax rate) or tax administration (the salaries of tax assessors or the presence of reduced rates for tax bases prone to non-compliance). Non-compliance is also found to have been higher in rural areas. Second, we explore the impact of delinquency on subsequent tax environments and municipal finances coming out of the Great Depression. To do so, we look for associations between municipal finance outcomes in 1936, at the end of the Depression, and previous rates of tax evasion. We use lags of the outcome variables, as well as measure outcomes and regressors of interest in variation, to account for autocorrelation and structural trends. We find that cities that experienced higher delinquency rates tended to have sustained lower amounts of revenue, despite having no remaining differences in housing markets or property value. This suggests

1 Tax delinquency corresponds to the non-payment of property taxes when they are due at the end of the fiscal year. It captures late payments as well as refusal to pay (Fairchild 1934). High levels of non-compliance were almost exclusively confined to property taxation, which is the subject of this analysis. We use the terms of tax delinquency and tax non-compliance interchangeably.

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that the effects of evasion tended to persist even after non-compliance rates returned to their usual rates. This paper is related to the literature on tax evasion and compliance, and on the economic impact of the Great Depression. The literature on tax compliance is reviewed by Slemrod and Yitzhaki (2002), and Slemrod (2007, 2019). We contribute to this literature by exploring factors associated with tax non-compliance in a context of the sudden emergence of a movement counseling refusal to pay taxes, and we provide evidence of the sustained impact of non-compliance episodes on municipal finances.2 The literature on the economic impact of the Great Depression has focused on the effect of New Deal policies (Fishback 2017). Recent studies have pointed to the importance of tax delinquency for municipal budgets, and its associated effects on debt (Siodla 2020). We contribute to this literature by systematically exploring the factors associated with tax non-compliance and their persistent impact on municipal revenue. The paper is structured as follows. In section ‘Background’, we present the historical background of tax delinquency during the Great Depression. In section ‘Data’, we summarize data sources. Section ‘Factors Associated with Tax Non-compliance’ describes factors associated with tax non-compliance during the Great Depression. In section ‘Persistent Effects of Tax Non-compliance’ we explore the consequences of tax noncompliance on city revenue. Section ‘Discussion’ critically discusses the results and their limitations. Section ‘Concluding Comments’ concludes.

Background The Great Depression was the most severe economic downturn in US history. Between 1929 and 1933, real gross domestic product (GDP) fell by 30%. It also marked the beginning of government activity dominated by state and federal spending instead of local spending. Municipal expenditures accounted for more than state and federal revenues in the 1890s (Legler et al. 1988), and more than half of all US government spending in the early twentieth century (Wallis 1984). This quickly changed with the New Deal. Beginning in 1933, the advent of federal programs reduced 2 Relatedly, Besley et al. (2019) study the implication of non-compliance to poll taxes in the United Kingdom. Our contribution is to explore the persistent impact of noncompliance on municipal revenue mobilization by cities, and to study non-compliance to property taxation.

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the share of local expenditure relative to total government spending, and increased state and federal grants received by municipalities (Wallis 1984). Nonetheless, property taxes remained the bulk of municipal revenues. At the same time, across 94 large US cities, real per capita revenue and spending grew or remained constant (Siodla 2020). This trend, however, masks large differences between local governments. While some cities fared better during the Great Depression, a significant share saw their revenue fall. Part of these differences has been attributed to rising tax delinquency during the Great Depression and declining real estate markets, which reduced cities’ tax base (Siodla 2020). As pointed out by Gilbert (1940), fluctuations in municipal budgets between 1902 and 1931 were primarily driven by local booms and busts in real estate. Housing markets started to slow down from the mid-1920s. Residential construction declined throughout the early 1930s (Siodla 2020). Cities where the largest construction booms happened in the 1920s were particularly affected by the ensuing bust in the early 1930s (Brocker and Hanes 2014). Moreover, home-building—which constituted the bulk of the tax base for property tax—was particularly affected and suffered more than other construction projects: according to a study by the US Bureau of Labor Statistics, about 60% of total building permit value came from residential permits in 1925, but this abruptly reduced to only 20% in 1934 (Bureau of Labor Statistics 1938). House prices similarly declined. Between 1929 and 1933, house prices fell by 36% in nominal terms, and 15% in real terms (Nicholas and Scherbina 2013), with real prices later falling even more in the Great Depression (Fishback and Kollmann 2014). As we will show below, this justifies the use of housing permits as a measure of the magnitude of economic shock faced by cities during the Great Depression. An important source of fiscal strain during the Great Depression was the rise in tax delinquency. Tax delinquency refers to the proportion of taxes that are due but remain unpaid. Forms of tax resistance were not common prior to the Great Depression (Beito 1989), but delinquency to property tax became a widespread phenomenon starting in 1929, and were exclusively concentrated on the refusal to pay property taxes (Fairchild 1934). The movement was largely organic and rarely evolved into other forms of resistance. One notable exception is the organized tax strikes that occurred in Chicago between 1930 and 1933 (Beito 1989). Bird (1934) credited the following factors for lowering tax delinquency during the Depression: (i) a strong economy; (ii) diversified sources of

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revenue; (iii) well-administered tax administration with strict enforcement and penalties; (iv) use of deferment in payment of taxes. In the case of New York, the elimination of personal property from the tax base— which is easier to evade—was seen as a contributing factor behind reduced delinquency. Another reported cause for tax delinquency was taxpayers’ inability to pay: during the Depression’s first three years, real income fell by 33% while unemployment reached 25% (Burg 2004). Real estate speculation or subdivision development—when lots were subdivided to increase profits (Bird 1936a)—led many cities to have a large number of vacant lots during the recession, with owners having little incentives to pay taxes, while house prices were depressed and construction activity plummeted (Field 1992). Overall, historical evidence points to tax delinquency being a major challenge for cities. It eroded an otherwise stable tax base (Bird 1936b). While tax delinquency was about 7% of the levy in 1929, it reached 27.7% in 1933 during the peak of the Depression. Delinquency rates then gradually decreased until reaching the level of the pre-Depression era by 1939 (The New York Times 1947). Property tax non-compliance led to an unprecedented and unplanned shortfall in municipal revenue. Two-thirds of cities with excessively highdelinquency rates during the Depression defaulted on their debt (Bird 1936a). Unpaid taxes led to a ‘creeping paralysis’ that prevented municipalities from exercising their vital functions.3 For instance, city commissioners in Jersey City ordered 40% pay cuts for their 3500 employees in 1933, citing tax collection problems, and a municipal official in St. Louis described tax delinquencies as preventing public employees from being paid, and reducing police, fire, and sanitary services (The New York Times 1933). This issue was compounded by the difficulty of borrowing money. In May 1933, for instance, about 60% of large cities were not able to find a market for their securities, which was a real issue, since many public services relied on borrowed funds. Tax collections suffered (Betters 1933), with current operations partially on credit in the majority of cities (Bird 1936a). Reductions in tax collections led many to demand that their city cut spending, a message pushed by banks, taxpayers, and lenders in many places (Beyer 1933; Beito 1989; Trout 1977) The tax resistance movement lacked national organization in cities, but garnered 3 The presence of tax sales helped reduce delinquency (Bird 1936a) by auctioning and selling property with uncollected property taxes, but remained limited.

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some cooperation through the Property Owners’ Division of the National Association of Real Estate Brokers (NAREB), which organized tax strikes and advocated for reductions in government spending, tax rates limits, and homestead exemptions to lower property taxes (Burg 2004; Beito 1989). Cities rapidly improved their fiscal standing after the Great Depression. Improvement in the economy, as well as better tax collection procedures and national campaigns to improve collection, helped (Bird 1936a; Leland 1933; Siodla 2020). Improved collection procedures included quarterly tax payments instead of annual payments, earlier billing during the fiscal year to avoid relying on credits for municipal services, and increased penalties for non-payments. States also passed legislation to reduce delinquency. This included ‘pay your taxes’ campaigns and forms of social norm shifts to improve compliance. In Chicago, the ‘pay your taxes campaign’ stressed citizens’ patriotic duty to pay their taxes, called those who did not pay ‘tax delinquents’, encouraged shopping at stores operated by ‘patriotic’ taxpayers, offered taxpayers reduced late penalties, and accused the tax strikers of anarchism and even treason (Burg 2004). Last but not least, an important component of reducing delinquency was the action taken by the Home Owners Loan Corporation (HOLC) toward the end of the Great Depression. The aim of the HOLC was to curb foreclosures by purchasing loans from private lenders, then later reissuing them with better terms and interest rates. In the meantime, property debts and back taxes were expunged or added into the loan’s principal. The agency thereby greatly helped resolve the delinquency crisis and encouraged the payment of back taxes (Fishback et al. 2013). Starting in 1934, the payment of back taxes helped cities recover their fiscal standing (Bird 1936a).

Data We assembled new panel data on cities’ financial statistics and compiled it with a measure of tax delinquency during the time of the Great Depression.

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Tax non-compliance Annual data on property tax delinquency rates between 1929 and 1936 comes from Bird (1931, 1934, 1938).4 Tax delinquency is defined as the percentage of tax levy not collected by a city at the end of a fiscal year, not including late collection. The panel covers 85 cities that reported tax delinquency by answering a survey on governmental research for large cities in which the population exceeded 30,000. After including city characteristics on tax administration, city tax rates or property valuation, our final panel includes 52 cities over the years 1929–1936. Municipal finances Municipal finances data come from the Financial Statistics of Cities. This annual reports series compiled by the US Census Bureau compiled and harmonized financial data for large cities. The criterion for inclusion in this series was all cities with a population above 30,000; this was increased to 100,000 in 1931. These reports provide information on property values, taxes collected, as well as the rate of property tax. The database thus collected covers 1900 to 1938, and includes more than 300 cities. We also complement this database with information on house prices in the form of building permit values compiled from the Bureau of Labor Statistics, provided by Siodla (2020). This index provides the average cost per family housing unit for each city, which proxies for house prices. Siodla (2020) also provides information on the number of permits issued, which we will use to measure residential construction activity. Table 12.1 provides a statistical summary of the variables used in the analysis. Trends Figures 12.1, 12.2, 12.3, 12.4, 12.5, 12.6, 12.7, 12.8 and 12.9 present trends in delinquency and municipal finance in cities. In order to be pertinent to the subject of inquiry, these trends are broken down into cities that experienced high-delinquency rates vs cities that experienced low delinquency rates. High and low evasion rates are based on the median value of evasion rates in 1933, when evasion was at its peak.

4 Data from Bird (1938) were provided by Siodla (2020). In the case of discrepancy between the data collected by Bird and sources from Bird, we used the latest source provided. The data for 1928 is only available for 44 cities and is not included in the analysis.

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Table 12.1 Summary statistics Variable

N

Tax delinquency kate Real property value per capita City property tax rate (%) Real revenue per capita Real revenue from property tax per capita Real penalty from property tax per capita Assessor: real salary Classification of taxable property Real expenditure per capita Real debt per capita Population Permits per thousand Permit value index Income score Fraction male Fraction Whites Fraction farm households Mayoral election year

Mean

SD

Min

Max

1100 1346 1335 1343 1342

0.19 39,829 1.35 701.4 438.6

0.13 21,468 0.73 448.6 335.6

0 8188 0.25 0 16.6

0.8 237,092 5.39 14,060 11,008

1342

5.4

7.2

0

113.3

1344 4688 1342 1342 4625 747 738 4314 4314 4314 4314 903

27,183 0.17 728 1699 91,473 1.74 106.53 9.12 0.49 0.93 0.01 0.39

14,473 0.37 445 1543 355,975 2.45 54.23 0.85 0.02 0.11 0.01 0.49

52 0 192 2 3771 0 10.78 0 0.41 0.46 0 0

95,027 1 13,317 42,649 7,245,175 23.98 1108.11 12.06 0.58 1 0.1 1

Factors Associated with Tax Non-compliance In this section we study the factors associated with high tax delinquency rates during the Great Depression. The empirical specification is the following: Dit = a + bX i,t + γi + εit

(12.1)

where D indicates the delinquency rate to property tax for city i in year t, and X captures the economic, political, geographic, and tax-related factors that might influence non-compliance. Economic factors include log housing permits per thousand and occupational income scores.5 The political factor corresponds to the presence of mayoral elections. Taxrelated factors refer to the tax rate for property taxation, the last available 5 The occupational income score represents the median total income (in hundreds of 1950 dollars) of each occupation in 1950 with positive income. See https://usa.ipums. org/usa-action/variables/OCCSCORE#description_section for more details.

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Fig. 12.1 Tax delinquency rate (Notes This figure shows the average tax delinquency rate at the city level, broken down by cities above or below the median tax delinquency rate in 1933)

value of assessor salary in log terms, and the presence of reduced rates for personal property, which is called classification of property. Demographic and geographic factors include the log population, the shares of male and white populations, the share of rural population, the log level of city expenditures per capita in real terms, and the log level of debt. εit corresponds to the error term. The specification includes state fixed effects γi to account for differences in levels of delinquency across states. It also includes a linear time trend and an indicator for the period 1929–1933 (the period of skyrocketing delinquency) to account for trends in delinquency and the non-linearity of delinquency during the Great Depression. In what follows, we will show that our results are robust to the inclusion of state fixed effects and controlling for time. Housing permits, assessors’ salaries, population, city expenditure, and debt are expressed in log terms, given their skewed distribution, as shown in Table 12.1. The results are presented in Table 12.2. Column 1 shows results with no state fixed effects, while Columns 2 and 3 show results with state fixed effects and additionally with time linear trends respectively. Log housing permits per thousand represent the fall in permits for new

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Fig. 12.2 Housing princes (Notes This figure shows the permit value index, broken down by cities above or below the median tax delinquency rate in 1933. Permit value index is a measure of the average cost per family housing unit as constructed by the Bureau of Labor Statistics, presented as an index, with 1930 as the base year. It is used as a proxy for house prices)

housing construction during each year of the Great Depression, and measure the magnitude of economic shock experienced by cities. We find that a lower level of permits is associated with greater levels of delinquency. This is statistically significant, robust to the inclusion of state fixed effects and controlling for time. Next, lower ability to pay is associated with more delinquency. This is shown by the negative association between the occupational income score and delinquency, with a coefficient of −0.0534 significant at the 5% level. A third factor associated with more delinquency is the presence of elections. Cities in a year of mayoral elections experienced a 1.06 percentage point increase in delinquency, which corresponds to a 5% increase and is statistically significant. This could be explained by more leniency on the part of tax officers during electoral years. We find limited evidence of tax administration being correlated with delinquency overall. There is no significant association between

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Fig. 12.3 Property value per capita (Notes This figure shows the average taxable property value per capita, broken down by cities above or below the median tax delinquency rate in 1933. Property value is defined as the annual value of property assessed for the purpose of property tax)

delinquency and either the salaries of tax assessors or the presence of classification of property.6 We also find no significant association between the burden of taxation—measured by the rate of property taxation—and delinquency, suggesting that it is ability to pay rather than the burden of taxation itself that is correlated with non-compliance. Focusing on property tax delinquency allows us to separate the importance of these two factors, as the tax base corresponds to property value and not the income of taxpayers. Finally, we find some significant demographic factors correlated with levels of delinquency. Delinquency was higher in cities with more males and more rural population. All in all, this analysis points to tax non-compliance being associated with economic conditions, taxpayers’ ability to pay and the presence of elections, but it is not associated with tax administration or the burden of taxation. It should be reiterated that we are looking at factors associated with the sudden rise in delinquency during the Great Depression, not the baseline level of delinquency. 6 Other tax reforms were also in place during this period, such as the implementation of the State Tax Commission. However, they occurred before the Great Depression, leaving little to no variation across cities during our sample period.

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Fig. 12.4 Rate of property tax (Notes This figure shows the average tax rate on property applied by cities, broken down by cities above or below the median tax delinquency rate in 1933)

Fig. 12.5 Housing permits (Notes This figure shows the average number of housing permits, broken down by cities above or below the median tax delinquency rate in 1933. The number of permits is a proxy for residential construction activity)

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Fig. 12.6 Municipal Spending (Notes This figure shows the average total municipal spending per capita, broken down by cities above or below the median tax delinquency rate in 1933)

Fig. 12.7 Municipal revenue (Notes This figure shows the average total municipal revenue per capita from all sources, broken down by cities above or below the median tax delinquency rate in 1933)

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Fig. 12.8 Municipal Revenue from Property Tax (Notes This figure shows the average municipal revenue per capita from property tax, broken down by cities above or below the median tax delinquency rate in 1933)

Fig. 12.9 Municipal Debt (Notes This figure shows the average amount of debt per capita, broken down by cities above or below the median tax delinquency rate in 1933)

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Table 12.2 Determinants of tax delinquency (1)

Log housing permits per thousand Income score Mayoral election year City property tax rate (%) Assessor: log real salary Classification Log population % Male % Whites % Farm households Log city expenditure per capita Log debt per capita Year 1929–1933 Observations Number of cities Period Mean DV Adjusted R 1 Controls State fixed effect

(2)

(3)

Dependent variable: Tax Delinquency Rate −0.0441*** −0.0347*** −0.0290*** (0.00688) (0.00715) (0.00639) −0.0403*** −0.0114 −0.0534** (0.0107) (0.00917) (0.0202) 0.0150** 0.0126** 0.0106** (0.00660) (0.00549) (0.00501) 0.0316** 0.0166 −0.00780 (0.0156) (0.0285) (0.0284) −0.00851 −0.0457 −0.0375 (0.00904) (0.0546) (0.0500) −0.00711 −0.000848 −0.00180 (0.0220) (0.0300) (0.0287) 0.0348 −0.00971 0.0452 (0.0484) (0.0489) (0.0414) 0.594 1.506 1.809* (1.089) (0.969) (0.949) −0.223* 0.445 0.331 (0.119) (0.293) (0.294) 8.666** 6.496*** 5.179** (3.411) (2.115) (2.011) −0.0274 0.0279 −0.0259 (0.0447) (0.0423) (0.0344) 0.000273 0.0225 0.0345 (0.0351) (0.0356) (0.0328) 0.0266*** (0.00493) 0.0667*** (0.0129) 379 379 379 52 52 52 1929–1936 1929–1936 1929–1936 0.19 0.19 0.19 0.36 0.66 0.69 X X X X X

Standard errors clustered at the city level. Significance levels: *10%, **5%, ***1%. Unit of observation: city-year. Classification is a dummy for whether the city used reduced tax rates for personal property

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Persistent Effects of Tax Non-compliance Next, we turn to the persistent consequences of tax non-compliance. As pointed out in Fig. 12.1, tax delinquency rates peaked during the Great Depression, in particular in 1933, but quickly started to decrease, and continued to steadily decrease after the Depression ended (Bird 1938; The New York Times 1947). However, even a short-lived phenomenon could have long-term implications for city finances. To explore this relation, we implement the following empirical specification: Yi , 1936 a Y i, 1929 − 1933 b Di , 1929 − 1933 εit

(12.2)

where the outcome variable Yi,1936 is measured in 1936 and Yi,1929−1933 corresponds to the average outcome value between 1929 and 1933, when non-payment of property taxes was widespread. Delinquency is similarly measured as an average between 1929 and 1933, and we explore its lasting effects on outcomes at the end of the Great Depression. Outcomes of interests are the municipal revenue per capita, tax revenue per capita, amount of property tax penalty, property tax rate, property value corresponding to the tax base, city expenditure, number of housing permits, and housing prices. The coefficient of interest is b, which estimates the lasting effect of past tax delinquency on municipal finances outcomes. We also include lagged values of outcomes to account for autocorrelation of outcomes (i.e. their tendency to be stationary). The sample is looking at cities in 1936 at the end of the tax delinquency episode. Table 12.3 shows the results. We focus on the interpretation of coefficients for tax delinquency on future outcomes. Column 1 reports that past delinquency had a long-lasting impact on city tax revenue. The effect on property tax revenue, which was directly affected by non-compliance, is measured to be −155.8, a statistically significant and large point estimate. Moving from the 25th to the 75th level of delinquency corresponds to a 5.6% decline in tax revenue four years later. This can be explained by a similarly sized persistent decline in the valuation of the tax base, as shown in Column 4. We find that tax rates tend to be higher in cities that experienced higher levels of delinquency, but this difference is not statistically significant. Finally, we find that although we cannot detect a strong difference in overall revenue between cities based on their experience of tax delinquency during the Great Depression, spending is persistently lower for those with higher levels of delinquency in 1929–1933. As shown in

0.938*** (0.0506) −155.8** (75.91) 52 1936 529.83 0.19 0.86

1.084*** (0.0960) 98.97 (118.2) 52 1936 845.05 0.19

0.86

(2) Property tax p.c.

0.65

2.084*** (0.289) 3.285 (9.337) 52 1936 11.17 0.19

(3) Property tax penalty p.c.

0.96

1.131*** (0.0322) 0.345 (0.219) 52 1936 1.36 0.19

(4) Property tax rate

0.91

0.911*** (0.0441) −14,403** (7,142) 52 1936 44,141 0.19

(5) Real property value p.c.

0.85

0.899*** (0.0594) −225.4* (126.8) 52 1936 799.14 0.19

(6) Real expenditure p.c.

Standard errors clustered at the city level. Significance levels: *10%, **5%, ***1%. Unit of observation: city-year

Cities Period Mean Y IQR delinquency Adjusted R 2

1929–1933

Delinquency

Y 1929–1933

(1) Real revenue p.c.

Table 12.3 Consequences of pas delinquency

0.60

0.990*** (0.148) −0.141 (1.178) 51 1936 0.93 0.19

(7) Permits per thousand

0.30

1.612*** (0.373) 19.27 (74.74) 51 1936 107.30 0.19

(8) Housing prices

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Column 6, moving from the 25th to the 75th level of delinquency in 1929–1933 is associated with a 5% lower level of city expenditure in 1936. This strongly suggests that the transitory episode of tax non-compliance had persistent effects on municipal tax revenue and real consequences for the services they provided. We find no evidence that housing markets remained more affected in high-delinquency cities, which is consistent with delinquency being the source of reduced municipal tax revenue and spending.

Discussion In this section we critically discuss the results presented above, their limitations, and policy implications. Limitations The main limitation of this study is that it presents an association between delinquency and the characteristics of cities. In other words, this does not correspond to evidence of causal determinants of delinquency, as we cannot exclude the presence of omitted variables affecting both the regressors of interest and delinquency. Given that the shock of delinquency was uniform throughout cities, with a priori unknown differences in intensity of ‘treatment’, it is implausible to construct a credible control group. However, to render robustness to our results, we have presented analysis with varying levels of controls that account for either fixed differences in city characteristics or control for time fixed effects. This limits the risk that our results are driven by obvious confounders such as race, differing levels of income or spending, or fixed differences between cities. Another potential confounder is that the extent of how a city was affected by the Depression also impacted tax delinquency. For instance, cities that were dependent on industries more impacted by the crisis could also have witnessed more delinquency. Absent a direct measure of exposure to the Depression, we have presented results that include fixed effects on cities, which account for fixed differences in city characteristics, such as differences in industry reliance. To the extent that differences in exposure to the crisis have effects on delinquency that do not vary over time, we have accounted for this potential confounder. The second main point of attention in our result is that we study a particular episode of tax history that led to substantial but short-lived

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delinquency.7 The results from this study are relevant in the context of tax resistance during an economic crisis. Although we find some effects on medium-term housing markets and property taxation, these are likely to be lower bounds. It would be interesting to study how this episode affects long-term norms of delinquency or fraud, as in Besley et al. (2019). This is beyond the scope of this study and is left for future research. Third, our measure of tax delinquency captures the share of expected tax levy that went uncollected. By construction, some of these unpaid taxes were arrears that were repaid in later fiscal years. However, to the extent that the rise of delinquency captures in large part decisions to evade taxes, as discussed by Bird (1936a), it provides a valuable proxy for the extent of delinquency in cities. Another limitation related to the measure of tax delinquency is that it ignores tax avoidance and undetected tax delinquency, such as shielding property from the tax base or under-valuing property. These dimensions of tax delinquency may respond differently to the form of delinquency we focus on here. Implications The results of this analysis call for two observations that carry policy implications. First, tax non-compliance as defined here is responsive to the economic environment. Tax revolts were of higher intensity in cities that were more severely hit by the house market collapse. This would make it harder for taxpayers to pay their dues. Relatedly, a higher tax rate places a greater burden on taxpayers, and may increase their propensity to evade.8 Therefore, one should expect the relative burden of taxation to exert a significant influence on the amount of tax evaded. Second, tax non-compliance is responsive to the political environment. We have provided evidence in the context of the Great Depression that the presence of mayoral elections was associated with a significant increase in delinquency. This illustrates the importance of ensuring high levels of enforcement and the absence of political opportunism in the collection of taxes.

7 Another characteristic of the episode we consider is that it affected compliance in regard to municipal taxes, as opposed to the more usually studied national tax compliance. 8 This result is unclear theoretically, and typically depends on the shape of risk aversion and the structure of the penalty, as discussed in Allingham and Sandmo (1972).

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Third, we find limited support for either tax administration or the burden of taxation playing a first-order role in tax non-compliance during the Great Depression. This does not preclude these factors from affecting the structural levels of compliance, but they were not correlated with higher levels of non-payment during the high increase in delinquency studied here. Fourth, delinquency during the Great Depression was focused on local taxes. Federal and local taxation were on very different paths prior to the Great Depression. Between 1920 and 1929, local taxes rose from 3.3 to 5.4% of national income. In contrast, federal taxes fell from 7.9 to 4.2% of national income. Local property taxes were concentrating all the blame and sentiment of inequity (Beito 1989), which might explain why delinquency was almost exclusively focused on this tax.

Concluding Comments We have explored the factors associated with tax non-compliance by studying the tax delinquency episode that took place during the Great Depression, and investigated differences in tax delinquency rates between cities, as well as medium-term consequences for municipal finances. We found that higher levels of tax non-compliance were associated with depressed housing markets, lower ability of taxpayers to pay, and the presence of mayoral elections. There is no evidence that either administration of the property tax or the rate of taxation was correlated with the level of delinquency. Despite the transitory nature of property tax delinquency, cities saw a sustained decrease in their revenues, suggesting that even short tax non-compliance episodes can have scarring effects on city governments. This episode also highlighted the fragility of using as the main source of revenue a tax base with high potential for delinquency. Tax delinquency compounded the economic shortfalls of the Great Depression for governments. These limits to the property tax led states to move away from this source of revenue, and reinforced calls for reforming municipal finances (Fairchild 1934; Bird 1936a; Wallis 2001; Hindman 2010).

Appendix See Fig. 12.10.

Fig. 12.10 Trends in Municipal Finances and Housing Markets (Notes See main text for details)

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Bibliography Allingham, Michael G., and Agnar Sandmo. 1972. Income Tax Evasion: A Theoretical Analysis. Journal of Public Economics 1 (3–4): 323–338. Beito, David T. 1989. Taxpayers in Revolt. Chapel Hill: University of North Carolina Press. Besley, Timothy, Anders Jensen, and Torsten Persson. 2019. Norms, Enforcement, and Tax Evasion. National Bureau of Economic Research. Betters, Paul V. 1933. Bolstering Municipal Credit. National Municipal Review 22: 268. Beyer, William C. 1933. Financial Dictators Replace Political Bosses. National Municipal Review 22: 162. Bird, Frederick L. 1934. The Four-Year Trend in Tax Delinquency. National Municipal Review 23: 110. Bird, Frederick L. 1936a. Extent and Distribution of Urban Tax Delinquency. Law and Contemporary Problems 3 (3): 337–346. Bird, Frederick L. 1936b. The Trend of Tax Delinquency 1930–1935: Cities Over 50,000 Population. New York: Dun and Bradstreet. Bird, Frederick L. 1938. The Trend of Tax Delinquency, 1930–1937: Cities Over 50,000 Population. Municipal Service Department, Dun & Bradstreet, Incorporated. Bird, Frederick Lucien. 1931. The Present Financial Status of 135 Cities in the United States and Canada. New York: Municipal Administration. Brocker, Michael, and Christopher Hanes. 2014. The 1920s American Real Estate Boom and the Downturn of the Great Depression. In Housing and Mortgage Markets in Historical Perspective. University of Chicago Pres. Burg, David F. 2004. An Encyclopedia of Tax Rebels, Revolts, and Riots from Antiquity to the Present. New York: Routledge. Fairchild, Fred R. 1934. The Problem of Tax Delinquency. The American Economic Review 24 (1): 140–150. Fairchild, Fred R., T.S. Adams, J. Roy Blough, Carl H. Chatters, Ralph T. Compton, Eric Englund, K.K. Kennan, Fred W. Morrison, Henry M. Powell, and Paul W. Wager. 1932. Preliminary Report of the Committee of the National Tax Association on Tax Delinquency, vol. 25, 292–331. National Tax Association. Field, Alexander James. 1992. Uncontrolled Land Development and the Duration of the Depression in the United States. Journal of Economic History 52 (4): 785–805. Fishback, Price. 2017. How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s. Journal of Economic Literature 55 (4): 1435–1485.

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Fishback, Price, and Trevor Kollmann. 2014. New Multicity Estimates of the Changes in Home Values, 1920–1940. In Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press. Fishback, Price V., Jonathan Rose, and Kenneth Snowden. 2013. Well Worth Saving: How the New Deal Safeguarded Home Ownership. Chicago: University of Chicago Press. Gilbert, Donald W. 1940. Cycles in Municipal Finance. The Review of Economics and Statistics 22 (4): 190–202. Hindman, Monty. 2010. The Rise and Fall of Wealth Taxation: An Inquiry into the Fiscal History of the American States. Doctoral dissertation, University of Michigan. Legler, John B., Richard Sylla, and John J. Wallis. 1988. US City Finances and the Growth of Government, 1850–1902. Journal of Economic History 48 (2): 347–356. Leland, Simeon E. 1933. How Governments Can Best Meet the Financial Crisis. City Manager Yearbook. Michigan Planning Commission. 1939. A Study of Subdivision Development in the Detroit Metropolitan Area. Commission report, Lansing, Michigan. Nicholas, Tom, and Anna Scherbina. 2013. Real Estate Prices During the Roaring Twenties and the Great Depression. Real Estate Economics 41 (2): 278–309. Siodla, James. 2020. Debt and Taxes: Fiscal Strain and US City Budgets During the Great Depression. Explorations in Economic History 76: 101328. Slemrod, Joel. 2007. Cheating Ourselves: The Economics of Tax Evasion. Journal of Economic Perspectives 21 (1): 25–48. Slemrod, Joel. 2019. Tax Compliance and Enforcement. Journal of Economic Literature 57 (4): 904–954. Slemrod, Joel, and Shlomo Yitzhaki. 2002. Tax Avoidance, Evasion, and Administration. In Handbook of Public Economics, vol. 3, 1423–1470. Amsterdam: Elsevier. The New York Times. 1933. Jersey City Cuts Its Payroll 40%. The New York Times, July 11. The New York Times. 1947. Cities Improving Tax Collections. The New York Times, July 20. Trout, Charles H. 1977. Boston, the Great Depression, and the New Deal, vol. 10. New York: Oxford University Press. U.S. Bureau of Labor Statistics. 1938. Statistics of Building Construction, 1920 to 1937. Bulletin 650. Wallis, John Joseph. 1984. The Birth of the Old Federalism: Financing the New Deal, 1932–1940. Journal of Economic History, 139–159. Wallis, John Joseph. 2001. A History of the Property Tax in America. In Property Taxation and Local Government Finance, ed. E. Wallace, 123–147. Cambridge, MA: Lincoln Institute of Land Policy.

PART III

Fighting Tax Evasion and Tax Havens?

CHAPTER 13

Criminalising Tax Evasion in France, Early Nineteenth Century–2008 Katia Weidenfeld

After a long period of indifference, the issue of tax resistance re-emerged in the public and academic arena, in France and abroad, at the end of the 1970s. This movement undoubtedly found its source in the work of Anglo-Saxon political scientists and economists, who turned the tax equation upside down to think of tax compliance not as a hypothesis but as a problem (Delalande 2009). Studies both empirical and theoretical are trying to understand the mechanisms of tax compliance (Roth et al. 1989) in order to determine the most effective tools, whether repressive or incentive (Klepper and

This text takes up and develops certain elements published by Spire and Weidenfeld (2015). K. Weidenfeld (B) Ecole Nationale Des Chartes, Paris, France e-mail: [email protected]

265 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_13

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Nagin 1989; Braithwaite 1989). In France, in order to accompany the renewal of administrative practices, senior civil servants have taken up the issue of the relationship between citizens and taxes (Dubergé 1961; Barilari 2000). However, particular episodes of resistance have never stopped being studied (Gossez 1953; Bercé 1972), and these developments have revived the interest of legal historians (de Crouy Chanel 1999; Beltrame 1995), sociologists (Spire 2018), and historians (Huret 2014) on this issue. Nicolas Delalande has endeavoured to retrace, over a long period of time, the resistance and strategies for building consent to taxation (2014). At the same time, the success of the notion of white-collar crime, first put forward in the late 1930s by Edwin Sutherland, has renewed attention on tax evasion. In France, the sociologist Pierre Lascoumes underlined the administrative specificities of criminal prosecution in this field (1983). In Great Britain, following the tradition of criminologists, the work of Dee Cook demonstrated that the treatment of tax evasion was much more benevolent than the management of social fraud (1989). None of these works, however, starts from a precise analysis of the chronology and conditions of the adoption of criminal legislation on tax evasion, which would make it possible to question global history. Contemporary tax history in France is marked by a paradox that can also be found in Great Britain (Spire and Weidenfeld 2017) and Italy (Ciancio 2023). If the denunciation of tax evasion is regularly on the agenda, the criminalisation of this offence is far from being obvious. Not only are the penalties provided by the law very rarely applied (Bocquet 2021), but the adoption of a repressive arsenal, including the most symbolic penalties such as imprisonment, has been the subject of a bumpy construction. The aim here is to shed light on this paradox, in the case of France, by tracing the pace and conditions of the adoption of laws criminalising tax evasion, as well as their implementation. The oppositions that are heard on the occasion of the criminalisation of tax evasion shed light on the distance between the “law in books” and the “law in action” that characterises this matter. Because of its symbolic dimension, penalisation also constitutes a privileged point of observation of the attachment shown to tax compliance as a social norm. While cyclical reasons partly explain the legislative or jurisdictional failure of the fight against tax evasion (Zucman 2013, 65), I would like to show here that the opposition to these attempts is the symptom of deeper resistance. These stem first of all from ongoing fears about the excesses

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of a “tax inquisition”. Can we allow an administration whose operations could seem arbitrary to initiate procedures that are considered infamous? The resolute integration of the fight against tax evasion in the policy of recovery of public finances is, moreover, the source of a lasting dilemma: is the carrot—in the form of amnesty, in particular—not more effective than the stick—in the form of penalties? In this history of French criminal tax law, three periods can be discerned: . The first corresponds to a long nineteenth-century period during which the tax evader was only considered as a delinquent if they took on the appearance of a common law delinquent. This is an idea that is still prevalent in the United States: the term fraud is spontaneously associated with cheating by the working classes (Spire 2013). . The second period, between the two wars, is a time of acclimatisation to direct taxes. Gradually, the State’s bad attitude towards tax evaders faded away in favour of promoting the idea that stealing from the State was still stealing. . Thirdly, from the Second World War onwards, the law clearly recognises the existence of this white-collar delinquency, but the objective of re-educating the tax evader takes precedence over that of punishing them.

Criminal Sanctions Limited to Indirect Taxes During the Long Nineteenth Century The revolutionary fiction of a purely voluntary tax—renamed “contribution”—left no room for the penalisation of tax evasion. However, from the Directoire onwards, the reappearance of indirect taxes (on salt, beverages, tobacco, playing cards, etc.) changed the situation. Resurrecting the duties of the Ancien Régime, they were often perceived as vexatious. The collectors of these indirect taxes were sometimes subjected to violent attacks. These employees in Isère were forced to resign because “we are insulted every day by the rabble (…). We are covered with spit” (Pinaud 2017). The more the tax pressure increased, the more numerous and violent were the movements of sedition. To avoid these acts of rebellion, laws once again considered the punishment of fraudsters. The law of “5 ventôse year XII” thus provided that

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“the objects of fraud will be seized and confiscated and the contraveners condemned to a fine equal to the quadruple of the defrauded rights” (Rondonneau 1809, 7). The following year, the Finance Act of 1806 imposed a similar punishment for evasion of duties on alcoholic beverages sold wholesale and retail and on the salt tax: in addition to the confiscation of seized goods, a fine of 100 francs—about one month’s salary of a Parisian construction worker—was to be imposed in the event of a contravention.1 However, the implementation of these sanctions was particularly complex. Above all, these were only fines. The loss of liberty was only incurred for debt, when the debtors could not pay the duties due to the Régie. From the Restoration onwards, a few laws introduced the possibility of prison sentences in certain cases, for those who evaded indirect duties. The finance law of 28 April 1816 thus imposed, in addition to the fine and confiscation, a 6-month prison sentence for those who smuggled “drinks” into the city “by climbing, underground, or with a gun”. In a context of economic crisis, there was a relative consensus on the need to improve the collection of already established duties, while an increase in direct contributions—which, in a system of censal suffrage, would have increased the electorate—was ruled out. But in 1824 the government failed to extend this severity to other frauds: some deputies—like Louis-Etienne Ricard, deputy for Gard—undoubtedly recognised that, generally speaking, “fraudsters commit a real theft”, but the prevailing view, defended by the Marquis de Lacaze, was that tax evasion was “the natural consequence of too high a tax”.2 Until the end of the nineteenth century, prison was only used to punish fraud committed in a particularly concealed manner (by climbing or going underground), or when there was a risk of opening the way to common law crime (armed robbery or gang crime). Other offences were only liable to fines. In reality, if “gangs (…) composed of the worst subjects (…)” were targeted, it was because “this population of fraudsters are the most

1 Bulletin des lois 1806, 443 and 452. 2 19 May 1824, Archives parlementaires, Chambre des députés, t. 40, 607ff.

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usual perpetrators of riots”.3 Tax evasion was seen as dangerous when it affected order, not finances. Moreover, the jurisdictional procedure was surrounded by strict procedural rules that were obstacles to the pronouncement of severe sentences. Firstly, the memory of the exceptional courts of the Ancien Régime, such as the intendant and the special commissions, led to the handing over of sentences to the ordinary justice system. Indirect tax evasion was thus mixed in with ordinary offences of moderate importance—violence and insults, theft, vagrancy or hunting offences. But the persistent mistrust of the judiciary gave these prosecutions very special characteristics. Everything was done to restrict the courts’ margin of appreciation (Girard 1836, 338). Secondly, and most importantly, the tax authorities—the Régie des contributions indirect (from now on Régie)—were given a pre-eminent place in the conduct of these criminal proceedings. It alone was able to initiate proceedings and did so in a discretionary manner.4 An investigation initiated by the public prosecutor was automatically dismissed.5 Even when the Régie initiated proceedings, it always had the right to abandon them, at any stage of the procedure, in order to reach a settlement with the tax evader. While the possibility to settle on the amount of the tax was denied, the tax administration had free rein to negotiate on the amount of the fines. When the Régie concluded a transaction with the tax evader, the public action was—contrary to what happened when a civil party renounced its action—struck from the record. In practice, prosecutions appear to have been rare (Santucci 1986, 300ff.; Arnaud-Duc 1997, 134), and the small tax evaders seem to have been the ones who paid the price. In 1841, the young Jeanne Constantin, aged less than sixteen, was fined 200 francs by the Bordeaux Court of Appeal for having brought into the city four barrels of alcohol hidden under her skirts.6 On the other hand, “deals” were frequent (Laporte 1966) and encouraged: in order to appease “resistance to the collection 3 Count d’Argout, Minister of Trade and Public Works, on the occasion of the discussion of a bill extending correctional penalties to fraudulent grants, Archives parlementaires, Chambre des pairs, 27 March 1832, t. 78, 5–6. 4 Cour de cassation (désormais Cass.) 25 August 1827, Journal du Palais, vol. 21, 773. 5 Cass., 24 February 1820, Sirey, 1820, 277. 6 Répertoire méthodique Dalloz, t. 35, v° peine, 659.

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of taxes”, the tax authorities recommended that their agents consent to the collection of taxes when the defendant made “offers that will appear admissible” (Chadeyras 1860, 119). Moreover, the nationalisation of tax collection—after the brief parenthesis of the communal farmers—did not remove suspicion from the tax collectors, and among them, the indirect tax agents were particularly closely watched. Unmasking duty fraud on consumer goods required surveillance that was frequently intrusive; to uncover smuggled goods, it was necessary to remove double bottoms from cars, lift women’s dresses, enter houses, have cellar doors opened, or watch people coming and going. Steps were taken to punish or make reparations for the untimely actions of the agents of the Régie in indirect ways. Firstly, in the event of ill-founded prosecutions, the Régie bore not only the costs of the trial, but also compensation proportionate to the value of the objects of which the seized person had been deprived during the time of the seizure (Chadeyras 1860, 25ff.). Secondly, from the end of 1814 onwards, tax officials did not benefit from the system of the ‘guarantee of civil servants’—which made any criminal prosecution of a public official subject to the authorisation of the government (Weidenfeld 2010, 211ff.). In order to pacify the tax relationship, the restored Monarchy intended to put an end to the “vexations to which taxpayers were continually exposed by tax collectors (…)” (Barafin 1814, 3). The possibility for taxpayers to directly call tax officials to account by suing them before the correctional judge was seen as one of the instruments used to achieve this. The central administration had to be informed of the summons of its agents, but it did not have to consent to it. The judge could even detain them on his own initiative (Carnot 1825, 254). The fate of tax officials was thus separated from that of other administrations, which continued to enjoy protection against criminal prosecution until 1870. This rule was reiterated annually in the Finance Act. By underlining that the hand of the tax authorities acted under the supervision of the correctional judge, the government intended to establish the legitimacy of the tax. In 1836, a Peer of France, Edouard Mounier, noted: “It was found that this provision [resulting from the 1814 law] had been very useful; the populations had supported the tax more; they knew that when

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the employees used rigorous means, these means were prescribed by law and that they could not go beyond them”.7 In fact, the agents of the indirect tax administration were under the jurisdiction of the courts. In 1822, the Court of Cassation recorded that agents who entered homes against the will of their occupants and without the assistance of a justice of the peace or the mayor were to be criminally condemned.8 The personal responsibility of the agents, who were often not very solvent, did not mean that the Régie was no longer liable. On the night of 3/4 October 1830, a man named Paul had tried to smuggle in a jug of wine to evade the entry and customs duties of ClermontFerrand. The customs employee Bedel had opposed him; in the struggle, he had used his pistol and killed the fraudster. The Assize Court sentenced him to one year in prison, but the widow of Paul also obtained from the administration of the Customs Office of Clermont and the administration of the indirect taxes a joint penalty of 6000 francs—an amount equivalent to twelve times the pension granted by the law of 13 December 1830 to the widows of the combatants of July—for damages, which the Court of Cassation confirmed.9 The way in which the penalisation of tax evasion was constructed in the nineteenth century was thus marked by a form of bad feeling towards the government. Resistance to taxation was largely seen as a response to abuses by the tax authorities or their agents. The sanctions provided by the law were therefore essentially pecuniary. Prison sentences were only imposed on tax evaders who were impecunious or dangerous because of their tendency to common law delinquency or their ability to organise a collective revolt.

The Difficult Extension of the Repressive Regime to Direct Taxes (1900–1936) While it seemed less present in the second half of the nineteenth century, the issue of curbing tax evasion became topical again in the first decades of the twentieth century. The acceleration of public spending, due to

7 16 April 1836, Archives parlementaires de 1787 à 1860, Recueil complet des débats législatifs et politiques des chambres françaises, 2ème série, t. 102, 159. 8 Cass., 1 February 1822, Sirey, 1823, I, 276. 9 30 January 1833, Journal du Palais, vol. 25, 1833, 99.

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the war and the development of the state’s functions, made it necessary to find new revenue streams (Tristram 2018). The reform of direct taxes led to wealth being taxed on less visible bases than those adopted after the Revolution, and the system was therefore more open to tax evasion. The introduction of these new levies was accompanied by the search for new techniques to control and punish tax evaders. But this policy was not without ambiguity. In the same way that the instruments (tax identity card, slips, booklets of slips, etc.) intended to detect tax evasion were sometimes abandoned before they were even put in place (Delalande 2014, 330ff.), governments showed little tenacity in defending their proposed anti-evasion weapons.10 Between 1908 and 1914, several bills were tabled to punish the evasion of new direct taxes, but they came up against a combination of oppositions. Firstly, the legal instruments chosen were sometimes clumsy. For example, to sanction heirs who came into possession of deposits and securities located abroad, disqualifying them in favour of more distant heirs came up against the “psychological difficulty of granting a sort of bonus to family denunciation (…) and making this denunciation the most precious auxiliary of the tax authorities”.11 Secondly, the criminal proceedings initiated by the administration of indirect taxes acted as a deterrent. During the discussion of the Caillaux bill on wine fraud, when the revolt of the Languedoc winegrowers was put down violently, the denunciation of the use of governmental force was particularly virulent. For example, a deputy, Emmanuel Brousse, noted the inequality of “justice and the Régie, lenient and liberal towards the big fraudsters (…) without mercy for the small (…). It [the administration] compromises on derisory terms with the big delinquents (…). The Régie is merciless towards bona fide offenders and humble delinquents who are driven to violate the law by poverty alone”.12 The context of the Great War nevertheless led to a hardening of the tone with regard to the tax evader, who, as underlined by deputy Maurice Bokanowski, “at a time when the nation is going to bear extraordinary

10 See the contribution by B. Touchelay in this volume. 11 For an account of these legislative attempts: Journal Officiel de la République française. Débats parlementaires (then JO Débats), Sénat, 30 May 1925 (2ème séance),

1115ff. 12 JO Débats, Chambre des députés, 25 January 1907, 172.

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burdens, must be ruthlessly punished, because he will burden the shoulders of the honest taxpayer with his due share”.13 There was a consensus that the impunity they enjoyed was an excessive indulgence. “It is necessary to get the idea, in our country, that anyone who evades the taxman commits a real crime”, urged the Minister of Finance, Louis-Lucien Klotz, in December 1917.14 The rapporteur of the tax legislation committee in the Chamber of Deputies, Ernest Lafont, added: “We must tolerate tax evasion less than ever. Theft at the expense of the State is no less theft”.15 However, these strict qualifications were not accompanied by the adoption of strong, definite sanctions. As early as 1918, a bill was introduced to oblige heirs to swear an oath to complete their inheritance declarations; any error could thus be punished by penalties for false oaths—from one to five years’ imprisonment—provided in the penal code. However, a watered-down version of the text was finally adopted. This removed the automaticity of the penalty.16 For the general income tax and the schedular taxes, the possibility of a penal sanction of the tax evaders was admitted by the law of 20 June 1920.17 However, parliamentarians provided numerous guarantees for the procedure.18 To avoid expeditious procedures that would turn the criminal sanction into a kind of “dry guillotine”19 in the words of the deputy René Lefebvre, the law restored to the judge his power to assess the intentionality of the offence. On the other hand, the tax administration alone remained empowered to initiate proceedings. This monopoly was conceived as a guarantee for the taxpayer: experience with indirect taxes showed that the tax administration never initiated proceedings, according to the deputy Jean-Baptiste Saget, “in a rash manner”.20 From the outset, the principle of an internal hierarchical circuit within the 13 JO Débats, Chambre des députés, 22 March 1917, 820. 14 JO Débats, Chambre des députés, 21 December 1917, 3437ff. 15 Ibid. 16 Law 18 April 1918, article 8, Journal Officiel de la République française. Lois et décrets (then JO), 19 April 1918, 3377. 17 Law 25 June 1920, Article 112, JO, 26 June 1920, 9004. 18 See in particular, JO Débats, Chambre des députés, 25 April 1920, 1342. 19 Ibid. 20 Ibid.

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Ministry of Finance prior to the complaint was established; there would be a complaint “only if the auditor, after having contacted his departmental director, who, in serious cases, will of course contact the Director General, recognises that the facts are sufficiently serious and that they denote sufficiently obvious bad faith”, as specified a few years later by Charles de Lasteyrie, Ministry of Finance.21 Moreover, the criminal sanction could only be applied in the case of manoeuvres intended to deceive the tax authorities (such as, for example, the production of false accounts). Finally, first-time offenders were only fined; it was only in the event of a repeat offence within five years that a prison sentence of between one and five years was incurred, as well as deprivation of civic rights. This law was limited in scope and was not enough to put an end to the massive tax evasion that weakened the tax system by increasing the contributions of those who paid them and by preventing a reduction in the general tax burden (Ligue des droits de l’homme 1925). The issue thus remained on the parliamentary agenda for several years. In 1924, the second Poincaré cabinet attempted to supplement the tax increases it had passed with a reinforcement of the fight against tax evasion. Taxpayers who deliberately failed to file their tax returns or to declare certain sums could be sent to prison for between six days and six months even if they were not repeat offenders. However, the government was weak in its defence of these articles in Parliament (Tristram 1997). The Minister of Finance himself, Charles de Lasteyrie, refused to accept the assimilation of tax evaders and ‘civic deserters’ portrayed by those in favour of severe repression,22 commenting that many of those who “for whatever reasons, did not fulfil their tax duty (…) are very good Frenchmen, who did their duty very valiantly during the war even if, from the tax point of view, they did not always set a very good example”.23 The law passed in March 192424 therefore reproduced, more or less, the sanctions provided in 1920. In the years that followed, the so-called Left-wing Cartel, who won the election of May 1924, also tried to pass prison sentences against tax evaders, but its attempts were easily defeated by the opposition. In 1925,

21 JO Débats, Chambre des députés, 22 February 1924, 937. 22 Henri Merlin, 30 May 1925, JO Débats, Sénat, 1120. 23 JO Débats, Chambre des députés, 22 February 1924, 957. 24 Law 23 March 1924, article 52, JO, 23 March 1924, 2757.

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some senators raised the spectre of a total disappearance of tax consent induced by such rigour: “Suppose a hunter who, holding the game at the end of his rifle, would shout so loudly that the game would immediately flee from his reach”,25 argued, for example, Senator Louis Dausset. The deputy Lucien Lamoureux used a similar argument in the following year to convince the Finance Committee of the Chamber of Deputies not to deliver prison sentences for first-time offenders: in his view, the main thing was “not to make income tax odious”.26 The only measure adopted was, through the law of 13 July 1925,27 an extension of the system provided for inheritance declarations of assets held abroad, but in practice, the application of penalties for false swearing remained almost impossible. If the Socialists on the Finance Committee, like Albert Bedouce or Marius Moutet, were attached to the threat of penal sanctions, it was mainly conceived as a budgetary tool. The objective was first to encourage taxpayers to “get back on track” and pay. Very classically, the law of 23 March 1924 therefore granted a tax amnesty, applicable to all taxes, for offences committed before 23 March 1924 and remedied within six months. It also granted a systematic right of repentance to taxpayers: when an inspector was convinced that an insufficient declaration was intentional, he or she had to, before any criminal proceedings, summon the taxpayer, show him or her the evidence of tax evasion and invite him or her to make good his or her omission within a given period. If the taxpayer agreed with the auditor, he/she would not be prosecuted. Only if he/she did not respond to the formal notice and refer the tax dispute to the prefectural council would the criminal judge be commissioned. The judges scrupulously ensured that the administration respected the implementation of this right to repentance.28 It was because of the absence of this procedure—which no law expressly provided for in the matter of declarations that concealed assets abroad—that the Paris Court of Appeal dropped, on 21 May 1933 (Revue de science et de législation financière 1933, 196), the legal proceedings opened with the Commercial 25 JO Débats, Sénat, 1 April 1925, 493. 26 Debates in the Finance Committee of the Chamber of Deputies on Article 16 of the

draft budget, 1 March 1926, National Archives, Pierrefitte-sur-Seine, C//14781. 27 Law 13 July 1925, Article 21, JO, 14 July 1925, 6467. 28 Cass., crim. 10 November 1937, Bulletin des contributions directes et du cadastre,

1938, 501.

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Bank of Basel against a thousand account holders—including members of the upper middle class, members of parliament, bishops, industrialists, newspaper owners—and against the Swiss bankers present in Paris who were paying interest and dividends directly to their clients for their securities that were not declared for tax purposes (Guex 2007). Even if jurists seemed unanimous in welcoming this decision, rendered “in the serenity that has always been the honour and reputation of justice in France”,29 the Basel bank scandal undoubtedly acted as a trigger in the awareness of the need to put an end to widespread tax evasion among economic and political elites; the Chambers, some of whose members had been implicated, were also undoubtedly less quick to oppose governmental projects on this point. The politico-financial affair of tax evasion in Switzerland first led to the suppression of the repentance procedure. The new code of direct taxes, resulting from the decree-law of 27 December 1934 (article 146), expressly provided that “proceedings are initiated on the complaint of the administration of direct taxes without the need, beforehand, to give the interested party formal notice to make or complete his declaration”.30 Secondly, the criminal suppression of tax evasion became tougher. First of all, it was the tax strikers that were targeted. In the hope of muzzling an anti-parliamentary organisation, called the Comités de Défense Paysanne (the peasant defence committees), which advocated the collective refusal to pay taxes, a law adopted on 28 February 1933 threatened the organisers with prison. Nevertheless, the condemnation of its leader, Henri Dorgères, to six months in prison in 1935,31 did not have the desired effect. In contrast, the suffragette movement did not seem to be targeted.32

29 “L’arrêt de la Cour sur les poursuites fiscales”, Journal des débats politiques et littéraires, 21 May 1933, 2. 30 JO, 29 December 1934, 13035. 31 Semaine juridique 1935, 1345. On the other hand, a certain Leclercq, who had

invited shopkeepers to burn their tax forms, was acquitted in 1936 by the Dunkirk criminal court on technical grounds, Sirey, 1937, III, 125. 32 A few days before the vote on the law of 28 Februrary 1933, the French Union for Women’s Suffrage threatened a tax strike (Le Petit Parisien, 24 February 1933), on the model of English practice at the beginning of the twentieth century, which had also played on the absurdity of the sanction to give their movement an echo (Boussahba-Bravard 2009).

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Above all, although the parliamentary discussion mitigated its provisions,33 the 1936 budget law made it possible to condemn first-time offenders who had, through fraudulent manoeuvres, evaded certain income taxes, to a prison sentence from six days to one month.34 However, the use of this new measure seemed very rare. The Bulletin des Contributions Directes only mentions one conviction by the Lyon Court of Appeal in 1939; this was of two brothers, merchants in Lyon, who had falsified their accounts, each sentenced to one month in prison.35 The Federal Union of Fighters made the same observation in an essay published anonymously by one of its members: “the sanctions against tax evaders are so benign that there is not even the fear of the gendarme (…) these sanctions are theoretical, nothing more” (L’Union fédérale 1936, 43). The punishment appeared to be like a “mystery” (Breton 1936, 253ff.). The penalties provided were in fact not only rarely used but were also very weak, especially when compared to those imposed in Germany or Great Britain to prevent the flight of assets (Farquet 2017, 344 and 440ff.). The government’s ambiguity with regard to this kind of evasion is further demonstrated by a Chautemps decree-law of 8 July 1937, which, in order to simplify and accelerate procedures, converted the correctional sanction for inaccuracy or omission in declarations of foreign assets into a purely tax fine (Cottin 1938, 109ff.). However, the symbolic significance of the possibility of punishing tax evaders36 with imprisonment should not be underestimated: it clearly 33 Two mitigations were obtained compared to the initial draft: imprisonment was not incurred in the case of voluntary inaccuracy in the declaration (fraudulent manoeuvres were required) and the court had the option of imposing only a fine (Sirey, I, 1936, 121). 34 Law 31 December 1935, article 7, JO, 1 January 1936, 3ff. 35 5 April 1939, Bulletin des contributions directes et du cadastre, 1940, 204. The

two other cases reported (pp. 209 and 219)—concealment linked to arranged balance sheets and an undeclared bank account abroad (Paris Court of Appeal of 5 and 29 May 1941)—were only punished by fines. 36 On the other hand, accountants who assisted in fraud were only liable to fines, even after the decree-law of 8 July 1937.

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showed that tax evasion could no longer, as the deputy Théodore Reinach said in 1909, be “classified among the venial sins that do not even require confession”.37 It had become a correctional offence.

Punishments and Convictions in the Second Half of the Twentieth Century After the Second World War, improving the effectiveness of taxation quickly became a central issue in the debates on this subject. Tax reform initially aimed to reorganise control and improve the coordination of the various administrations (Tristram 2013), thanks, among other things, to the creation of a “tax record” in 1948.38 The criminal aspect was not completely forgotten, though. The “general re-education of taxpayers” (Touchelay 2007) also involved various measures to increase the visibility of criminal sanctions. The clearly stated objective, expressed by the secretary of State Guy Petit in April 1952, was to create sanctions that “fire the imagination”.39 Faced with a judicial response that was considered slow and benevolent, Antoine Pinay’s government equipped itself with an instrument to “act quickly in an exemplary manner” and punish “inveterate tax evaders more severely”.40 A departmental commission, chaired by the prefect and composed of the presidents of the civil court, the commercial court, and the Chamber of Commerce, as well as the treasurer-general or the departmental director of the tax department, could decide, before any criminal sanction, to punish—with a provisional ban on both their professional practice and their driving licence—any taxpayer against whom the tax administration had filed a complaint. This provisional ban, published in the Official Journal, had another consequence: it obliged the judge, if

37 JO Débats, Chambre des députés, 8 March 1909, 676. This was also the meaning of the increased publicity of convictions, particularly in the case of false oaths, with the law of 30 July 1936. 38 Law 6 January 1948, article 45, JO, 7 January 1948, 198. 39 JO Débats, Conseil de la République, 11 April 1952, 1014. 40 Ibid.

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they subsequently found the taxpayer guilty, to impose a professional and driving ban for a period of at least five years.41 Also intended to accentuate the moral impact of judgments, the systematic publication of convictions for tax evasion finally,42 in 1954, replaced the option open to the courts from 1920.43 Convicted taxpayers were henceforth obliged to publish the judgement in the Official Journal and in the press at their own expense, and to post it on the official notice boards of the commune and on the outside door of their building for three months. In response to the movement led by Pierre Poujade, who denounced the tax pressure exerted on traders and craftsmen, the penalisation of tax obstruction was extended—following an amendment by the deputy Henry Dorey and supported by the Secretary of State for the Budget, Henri Ulver44 —with effects that were just as mixed as twenty years earlier (Souillac 2007). At the same time, the penalties for tax evasion were increased in the 1950s and 1960s. Once again, the government’s stated objective was to limit the increase in burdens on honest taxpayers by “tracking down those who evade” because “the greatest tax injustice comes from tax evasion”.45 In 1954, the prison sentence was substantially increased from one to five years for first-time offenders. A few years later, the level of fines that the correctional judge could impose was tripled. To symbolise the interest of taxpayers “who fully and correctly discharge their tax obligations”46 in combating tax evasion, professional groups were encouraged by Valéry Giscard d’Estaing, then Under Secretary of State for Finance, in November 1959, to take civil action against tax evaders. But the ambiguity as to the real purpose of this repressive arsenal remained. Prison was in fact, above all, a threat to the taxpayers to convince them to pay.47 Thus, the 1952 law granted a period of

41 Law no. 52-401 14 April 1952, article 47, JO, 15 April 1952, 3940. 42 The provision was already included in Article 45 of the 1952 bill, which was reserved

for discussion, JO Débats, Assemblée nationale, 4 April 1952, 1930. 43 Law no. 54-404 10 April 1954, article 37, JO, 11 April 1954, 3486. 44 Law no. 54-817 14 August 1954, article 33, JO, 17 August 1954, 7896. 45 JO Débats, Conseil de la République, 7 April 1954, 691. 46 JO Débats, Sénat, 18 November 1959, 1026. 47 JO Débats, Conseil de la République, 8 April 1954, 747.

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grace to those who made declarations within two months of the law’s publication.48 The refusal to reinforce the criminal aspect in the 1963 tax reform clearly indicates the ambiguity surrounding tax evasion. The project to complete the unification of tax administration structures, presented by Valéry Giscard d’Estaing,49 originally included elements relating to criminal procedure. It thus proposed to align the qualifications for tax evasion with common law offences, in particular “theft with all its penal consequences”.50 In particular, the administration could lose the possibility of withdrawing its complaint if it reached a settlement with the tax evader during the procedure. However, neither the Assembly nor the Senate accepted these developments.51 Finally, in the autumn the government withdrew all the articles concerned with the criminalisation of tax evasion.52 As Jacques Chaban-Delmas, then President of the National Assembly, theorised on this occasion, the tax evader remained a particular delinquent who had to be brought back into line, rather than punished: “It is not enough to simply try to defeat the taxpayers who are tempted by tax evasion. We must also try to convince them. Honest taxpayers want fair play in their dealings with the administration. The establishment of better human relations in this area would benefit everyone and would better serve the general interest of the nation”.53 In fact, criminal prosecutions based on legislation introduced in the 1950s remained relatively rare. In the area of direct taxation, less than a hundred cases are brought before the criminal courts each year, and perhaps as many in the area of indirect taxation.54 From the beginning of the 1970s, in parallel with the strong development of controls on the tax situation of companies, and especially 48 Law no. 52-401 14 April 1952, article 46 §2, JO, 15 April 1952, 3940. 49 JO Débats, Assemblée nationale, 9 July 1963, 4000. 50 Ibid. 51 JO Débats, Assemblée nationale, 10 July 1963, 4005. 52 JO Débats, Sénat, 24 October 1963, 2150. Law no. 63-1316 on 27 December

1963 portant unification ou harmonisation des procédures, délais et pénalités en matière fiscale, JO, 29 December 1963, 11827. 53 JO Débats, Assemblée nationale, 9 July 1963, 3942–3943. 54 Cf. JO Débats, Assemblée nationale, 10 July 1963, 3999 (deputy Pierre-Charles

Krieg, who estimated the number of tax complaints at about 200) and p. 4007 (deputy Marcel Massot, who estimated the number of direct tax complaints at 80).

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individuals, the number of criminal proceedings increased: from 155 in 1971 to over 700 in 1975. The generalisation of Value Added Tax in 1968, which increased the opportunities for large-scale tax evasion, also contributed to this trend: of the 740 criminal proceedings instituted in 1975, 80% concerned turnover taxes.55 Sentences handed down, even for “major tax evaders”, were described as “minimal”, as the Secretary of State, Pierre Bernard-Raymond, himself confessed.56 Perhaps to remedy this lack of severity, the government increasingly used the semi-judicial instrument of provisional punishment: between fifty and one hundred people charged with tax evasion had their driving licences withdrawn as a preventive measure or were banned from practising their profession between 1972 and 1975. As many parliamentarians pointed out—those on the left of the political spectrum, especially on the Communist benches,57 and those on the right in the wake of the Poujade and Gérard Nicoud movements, the suppression of tax evasion affected the bosses of small and mediumsized companies much more than those of very large companies.58 As Jean Lecanuet, Minister of Justice, pointed out in his reply, “imagining the example of the small to defend the big”59 was certainly a common rhetorical device. But the criminal suppression of tax evasion seemed to be unevenly distributed. The provisional bans, which in principle were only levied in cases of exceptional tax evasion, mainly affected craftsmen or managers of small and medium-sized companies. Among the people affected by these measures, there were undoubtedly a few prominent individuals, such as Alain Christiaens, CEO of the company Etude et Financement de Construction Drouard.60 Above all, though, it was many small crooks

55 JO Débats, Sénat, 27 October 1977, 2459. 56 JO Sénat, 27 October 1977, 2479. 57 JO Débats, Assemblée nationale, 23 May 1950, 3807. See also the questions raised by René Rieubon, of the Communist Group, on the lack of follow-up in the tax fraud cases of the large media group Amaury or of the large arms company Dassault, JO Débats, Assemblée nationale, 22 June 1977, 4070. 58 Question by the communist deputy Vincent Porelli (n°21231), JO Débats, Assemblée nationale, 12 July 1975, 5156. 59 JO Débats, Sénat, 18 June 1975, 1733. 60 JO, 15 May 1976, 2918.

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of all kinds—fishmongers, metal salvagers, building contractors, mailorder sellers, property dealers—who were targeted. The same was true of criminal prosecutions. As Jean Cosson, a magistrate specialised in economic criminality, deplored in 1978, the suppression of tax evasion was mainly indicative of the “hypocrisy” of political leaders who—beyond the assertions of principle—treated with indulgence the “industrialists of tax evasion” (Cosson 1978). Nevertheless, from the beginning of Valéry Giscard d’Estaing’s term of office, in May 1974, the higher social classes—lawyers, architects, doctors—were sometimes involved. A few high-profile cases affected prominent individuals and raised questions about the political uses of the fight against tax evasion, notably when a leading surgeon who supported the candidate Jacques Chaban-Delmas was implicated (L’opération Judet 1976). This criticism may explain, in part, the difference between the government’s response to the anti-tax mood of the 1970s and those of the 1930s or 1950s. While the ambition then was to increase the restriction of tax evasion and the incitement to strike, in the second half of the 1970s the government had the ambition, in the words of the deputy and soon-to-be Minister for the Budget, Maurice Papon, to avoid “the divorce between the citizens and their administration”.61 The orientation was clear: the workings of an over-powerful administration with which it was impossible to maintain an equal dialogue had to be replaced: a “contractual tax system” had to be built.62 This principle was applied in two ways. On the one hand, purely tax sanctions– which were aimed at taxpayers who had agreed, at least during the audit, to cooperate –continued to decline, as they had done since 1963. On the other hand, guarantees were granted to taxpayers to protect them from arbitrary prosecution. This was the main purpose of the law of 29 December 1977, which was presented above all as a first step towards putting an end to this “cold war”,63 as it was described by the senator Louis Virapoullé in October 1977, between the French and the tax authorities. The right to provisionally prohibit the exercise of certain professions and the use of the driving

61 JO Débats, Assemblée nationale, 22 June 1977, 4058ff. 62 Senator Guy Petit, JO Débats, Sénat, 27 October 1977, 2474. 63 JO Débats, Sénat, 27 October 1977, 2460.

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licence was taken away from the administration; the judge regained full freedom to impose, or not, these accessory penalties, the maximum duration of which was reduced from 10 to three years. Additionally, the law solemnly affirmed the classic principle of criminal procedure, according to which the burden of proof of the intentional nature of the fraud lay with the prosecution, the public prosecutor, and the administration. To prevent the government from arbitrarily choosing the taxpayers referred to the criminal judge, a Commission for Tax Offences, composed of magistrates from the Court of Auditors and the Council of State, was created. This body was intended to act, again in the words of the senator Louis Virapoullé, as a “filter that… will preach fairness and moderation”64 : only cases selected by it could be referred to the criminal courts. Contrary to the project’s initial forecasts, this commission could only act in favour of the taxpayer: it could not take over serious tax evasions that the administration wanted to keep out of court. The new procedure was certainly not intended to increase the number of criminal complaints, which currently stood at around 700 per year.65 In fact, initially, this desire for appeasement led to a reduction in controls and, even more significantly, in the number of criminal prosecutions, which decreased to less than 500 per year, and sometimes very much lower, until 1982 (Spire and Weidenfeld 2015). With the victory of the Socialist Party presidential candidate, François Mitterrand, in 1981, the imperative to fight tax evasion was put forward again.66 The number of staff in the control services was slightly increased; technical measures were taken to improve the administration’s information on assets and income. Criminal procedures were also increased. However, this relative hardening did not mean that the new culture of dialogue between the administration and taxpayers, or the immediate budgetary vocation of the fight against tax evasion, was being renounced. For example, amnesty measures were still periodically available to taxpayers wishing to comply. The one provided by the 1982 Finance Act (art. 100)67 was particularly broad: taxpayers who admitted to the inadequacies of their declarations before 1 August 1982 could escape not

64 JO Débats, Sénat, 27 October 1977, 2468. 65 JO Débats, Assemblée nationale, 22 June 1977, 4068 and 4069. 66 JO Débats, Assemblée nationale, 19 November 1982, 7512. 67 Law no. 81-1160, 30 December 1981, JO, 31 December 1981, 3556.

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only criminal prosecution but also tax increases. Nor did there seem to be any question of making criminal prosecution automatic, even in the case of serious tax evasion. Although the government proposed, in the draft finance law for 1983, that tax evasions exceeding one million francs should necessarily be punished by a prison sentence (Article 54), eventually it easily renounced, through the voice of Laurent Fabius, Minister for the Budget, this provision, and reaffirmed its wish not to re-establish the “tax inquisition”.68 The legal framework of the criminalisation of tax evasion thus remained particularly stable until the end the early 2010s. The only thing that can be noted is the temporary suppression, between 1992 and 1994, of the judge’s ability to deprive the person convicted of tax evasion of his or her civic, civil, and family rights, which resulted in ineligibility. Practice has not changed either. After a slight increase in the 1980s and 1990s, the number of criminal complaints froze at just under a thousand a year in the early 2000s. The instrument of criminal suppression thus remains used in very limited proportions.

Conclusion: A Purely Symbolic Penalisation The twentieth century marked in France a slow acclimatisation of the criminalisation of tax evasion, which the idea of voluntary taxation had excluded. The symbolic function attached to criminal law—to express a principled disapproval of tax offenders—was clearly recognised: this is what led parliamentarians and governments to enshrine in law the emblematic penalty of imprisonment and the measures to publicise the sentence. However, the other functions of criminal sanctions were not, or were hardly ever, used (van de Kerchove 2005). Thus, the dissuasive virtue was not really sought; the taxpayers were in fact allowed to ‘redeem’ themselves, even after the detection of their tax evasion. As the parliamentary debates of the twentieth century constantly remind us, correctional proceedings were only intended to reach taxpayers who absolutely refused to enter into the tax contractualisation process. For a tax evasion to lead to criminal proceedings, the perpetrator had not only to have avoided the levy but also to have disdained to use the amnesty windows that were periodically offered to them, such as the various

68 JO Débats Sénat, 11 December 1982, 6724.

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negotiation procedures with the auditor and the auditor’s superiors. The choice of a model based on rare prosecutions, targeting essentially lower social strata or political resistance to taxation, also reveals a lack of will to make the penalty play a socio-pedagogical function. As for the role of reparation, it was essentially assumed by purely tax (non-criminal) sanctions. The construction of criminal tax legislation in the twentieth century thus resembles a tiger that its authors conceived from the outset as being essentially paper-based. From 2008 onwards, the multiplication of scandals revealing very large-scale tax evasion justified a tightening of the suppressive legislation and a renewal of the structures responsible for applying them in France. Nevertheless, the broad possibilities of regularisation granted to taxpayers do not show a clear change in penal philosophy: tax evasion is publicly presented as a crime in that it steals from the State, but in practice, its criminal punishment is reserved for those who, beyond the fraudulent evasion of taxes, defy the authority of the State by refusing to participate in any discussion.

Bibliography Arnaud-Duc, Nicole. 1997. La discipline au quotidien. La justice correctionnelle dans la Provence aixoise du XIXème siècle. Dijon: éditions de l’Université de Dijon. Barafin, Pierre-Paul-Joseph. 1817. Exposé sommaire de la législation des impositions indirectes suivi d’un mémoire adressé en mai 1814 au chancelier de France sur la législation des droits réunis contenant plusieurs anecdotes curieuses et peu connues sur la gestion vexatoire des préposés de la régie. Bruxelles: Auguste Wahlen. Barilari, André. 2000. Le consentement à l’impôt. Paris: Presses de Sciences Po. Beltrame, Pierre. 1995. Le consentement de l’impôt. Devenir d’un grand Principe. Revue Française De Finances Publiques 51: 81–90. Bercé, Yves-Marie. 1972. Croquants et nu-pieds. Les soulèvements paysans en France du XVIè au XIXè siècle. Paris: Gallimard. Bocquet, Alain and Eric, with Pierre Gaumeton. 2021. Milliards en fuite. Manifeste pour une finance éthique. Paris: Le Cherche Midi. Boussahba-Bravard, Myriam. 2009. Résistance passive et citoyenneté; la rébellion de la contribuable anglaise. Revue D’histoire Moderne Et Contemporaine 562 (2): 104–134. Braithwaite, John. 1989. Crime, Shame and Reintegration. Cambridge: Cambridge University Press.

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Breton, Jean-Ghislain. 1936. La fraude fiscale des valeurs mobilières en ce qui concerne les impôts sur le revenu. Thèse pour le doctorat. Nancy: Faculté de droit. Carnot, Joseph-François-Claude. 1825. Commentaire sur le code pénal. Paris: Nève. Chadeyras, A. 1860. Traité du contentieux des contributions indirectes. Nantes: Félix Masseaux. Ciancio, Cristina. 2023. Le consentement à l’impôt après l’unification italienne et l’influence de l’expérience historique française (XIXème-XXème siècles). In France-Italie allers/retours: la volonté, éd. Florent Garnier and al. Toulouse: Presses de l’Université Toulouse 1 Capitole. Cook, Dee. 1989. Rich Law, Poor Law. Differential Response to Tax and Supplementary Benefit Fraud. Maidenhead: Open University Press. Cosson, Jean. 1978. Les Industriels de la fraude fiscale. Paris: Le Seuil. Cottin, Henri. 1938. Les récentes mesures fiscales contre les fraudes sur les valeurs mobilières (1936–1938). Thèse pour le doctorat. Paris: Faculté de droit. de Crouy Chanel, Emmanuel. 1999. Le contribuable-citoyen. Histoire d’une représentation fiscale, 1750–1999. Thèse pour le doctorat: Paris I Panthéon Sorbonne. Delalande, Nicolas. 2009. Le consentement à l’impôt en France: Les contribuables, l’administration et le problème de la confiance. Revue D’histoire Moderne Et Contemporaine 56–2: 135–163. Delalande, Nicolas. 2014. Les Batailles de l’impôt. Consentement et résistances de 1789 à nos jours. Paris: Le Seuil. Dubergé, Jean. 1961. La psychologie sociale de l’impôt dans la France d’aujourd’hui. Paris: Presses universitaires de France. Farquet, Christophe. 2017. La Défense du paradis fiscal suisse avant la Seconde Guerre mondiale. Une histoire internationale. Neuchâtel: Alphil éditions. Girard, D. 1836. Manuel des contributions indirectes et des octrois. Paris: Renard. Gossez, Rémi. 1953. La résistance à l’impôt: Les quarante-cinq centimes. Bibliothèque de la Révolution de 1848 (15): 89–132. Guex, Sébastien. 2007. 1932: l’affaire des fraudes fiscales et le gouvernement Herriot. L’économie Politique 33 (1): 89–104. Huret, Romain. 2014. American Tax Resisters. Cambridge, MA: Harvard University Press. Klepper, Stenven, and Daniel Nagin. 1989. The deterrent effect of perceived certainty and severity of punishment revisited. Criminology 27 (4): 721–746. La Réforme fiscale. 1936. Paris: L’Union fédérale des combattants. Laporte, Pierre. 1966. Les transactions en matière de douanes et de contributions indirectes. Annales de la Faculté de droit et de sciences économiques de clermont 3: 39–60.

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Lascoumes, Pierre. 1983. Sanction des fautes ou gestion des illégalismes: l’hétérogénéisation du droit pénal. Un exemple, la répression fiscale. Revue Interdisciplinaire D’études Juridiques 10: 125–156. Ligue des droits de l’homme, 1925. Le Congrès national de 1924. Compte-rendu sténographique. 27–29 décembre 1924. Paris. L’opération Judet. 1976. Le Nouvel Observateur, August 16. Pinaud, Pierre-François. 2017. Chuchotements, cris et rébellions fiscales (1790– 1814). Napoleonica. La Revue 28 (1): 36–45. Rondonneau, Louis. 1809. Manuel des propriétaires et des marchands de boissons. Paris: Ancelle. Roth, Jeffrey A., John T. Scholz, and Ann Dryden Witte (eds). 1989, Taxpayer Compliance, Volume 1. An Agenda for Research. Philadelphia: University of Pennsylvania Press. Santucci, Marie-Renée. 1986. Délinquance et répression au XIX e siècle. L’exemple de l’Hérault. Paris: Economica. Souillac, Romain. 2007. Le mouvement Poujade: De la défense professionnelle au populisme nationaliste (1953–1962). Paris: Presses de Sciences Po. Spire, Alexis. 2013. Pour une approche sociologique de la délinquance en col blanc. Champ Pénal/penal Field. https://doi.org/10.4000/champpenal. 8582. Spire, Alexis. 2018. Résistances à l’impôt, attachement à l’Etat. Enquête sur les contribuables français. Paris: Le Seuil. Spire, Alexis, and Katia Weidenfeld. 2015. L’impunité fiscale. Quand l’État brade sa souveraineté. Paris: La Découverte. Spire, Alexis, and Katia Weidenfeld. 2017. Punishing tax offenders in France and Great Britain: Two criminal policies. Journal of Financial Crime 24 (4): 574–588. https://hal-02273409. Touchelay, Béatrice. 2007. La diffusion et l’application des normes comptables standardisées en France des années 1920 aux années 1960. L’utopie de la transparence? In Fraude, contrefaçon, contrebande de l’Antiquité à nos jours, ed. Gérard Béaur. 385–409, Genève: Librairie Droz. Tristram, Frédéric. 1997. L’administration fiscale et l’impôt sur le revenu dans l’entre-deux-guerres. Etudes et documents IX: 211–242. Paris: Comité pour l’histoire économique et financière de la France. Tristram, Frédéric. 2013. Une fiscalité pour la croissance. La direction générale des Impôts et la politique fiscale en France de 1948 à la fin des années 1960. Paris: Comité pour l’histoire économique et financière de la France. Tristram, Frédéric. 2018. Première Guerre mondiale et la rénovation du système fiscal français. In Une fiscalité de guerre? Contraintes, innovations, résistances, 189–210. Paris: Institut de la gestion publique et du développement économique.

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van de Kerchove, Michel. 2005, Les fonctions de la sanction pénale. Entre droit et philosophie. Informations sociales, 127: 22–31. Weidenfeld, Katia. 2010. Histoire du droit administratif . Paris: Economica. Zucman, Gabriel. 2013. La richesse cachée des nations. Paris: Le Seuil.

CHAPTER 14

“These Patriots Who Misuse the Law”: The Background to the United Kingdom’s Anti-Tax Haven Legislation of 1936 James Hollis

In the late 1920s and early 1930s, the British direct tax authority, the Inland Revenue, became increasingly concerned about the amount of tax revenue that was being lost to the state as a result of legal tax avoidance. By 1935, they estimated the total annual loss from legal avoidance of income tax at £8 million (equating to 3% of net receipts), while the avoidance of inheritance tax, too, was “believed to be rapidly growing.”1 Of the £8 million figure, some £3 million, or 40%, was attributable to 1 Edward Forber (Chairman of the Board of Inland Revenue) to Neville Chamberlain (Chancellor of the Exchequer), 28 Nov 1935, National Archives of the United Kingdom (TNA), London, T 171/318; Gerald Canny (Inland Revenue) to Edward Forber, 3 Jul 1934, TNA, IR 40/4548.

J. Hollis (B) University of Oxford, Oxford, UK e-mail: [email protected]

289 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_14

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what the Revenue called “avoidance within the foreign sphere”—hereinafter termed “offshore avoidance”—reflecting a 10% increase on the previous year’s estimate. This category of avoidance, involving holding companies and trusts located in tax havens, represented the largest single cause of tax leakage and bringing it under control was the Revenue’s top priority. In 1936, they procured the enactment of what they themselves characterized as a “drastic” anti-avoidance law, namely section 18 of the Finance Act 1936, which was designed to curtail the offshore avoidance of income tax conclusively.2 At the same time, Parliament passed separate measures to curb the cross-border avoidance of death duties (Finance Act 1936: section 24). The British anti-tax haven legislation of 1936, which remains on the statute book in a modified form today, is familiar to practitioners of revenue law, while legal historians such as Colin Masters have comprehensively charted its evolution since it was first enacted (Masters 1992: 4015–80). Apart from receiving brief mentions in the work of Assaf Likhovski and Peter Scott, however, the background to the anti-tax haven law has been virtually ignored by historians, which is curious when one considers that another famous anti-avoidance rule dating from the same year (targeting trusts in favour of children) has been extensively contextualized by David Stopforth (Likhovski 2007: 209, 211; Scott 2022: 179, 187, 191, 193; Finance Act 1936, section 21; Stopforth 1988: 136–195). Insofar as the prehistory of the anti-tax haven law has been touched upon at all, swingeing tax rises during World War I tend to be seen as a sufficient explanation for the growth of offshore avoidance (Masters 1992: 4016). It ought to be a trite observation, though, that there is no automatic correlation between high tax rates and legal avoidance. In order for avoidance to occur, there have to be latent potentialities contained within the legal code, as that code is interpreted by the courts and implemented by the tax authority. Today, law and practice have been refined to a point where it is very difficult for most people to avoid tax legally, but in the past, such opportunities were far more extensive. Only by appreciating how legal rules changed over time can we understand why both the prevalence of avoidance, and its methodology, evolved in the ways that they did.

2 Report of the Departmental Evasion Committee: p. 14, Feb 1934, TNA, IR 40/4574.

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This chapter uses a variety of sources, including the Revenue’s contemporary working papers (some only recently released under the Freedom of Information Act), to reconstruct the British experience with offshore avoidance over a 40-year period, from the beginning of the twentieth century to the end of the 1930s. The chapter argues that, contrary to received wisdom, offshore avoidance did not begin in 1914. Indeed, the specific type of offshore avoidance that flourished in the interwar period, using holding companies and trusts, was a direct consequence of laws passed to suppress earlier methods before World War I even began. And while offshore techniques certainly grew in popularity during the 1920s, that was not simply in response to higher rates; it was also a reflection of the fact that legislative efforts to combat avoidance focused exclusively on onshore methods, making offshore tax planning especially attractive. The Revenue were aware of this dynamic, but had trouble accurately assessing its scope and scale because of the extreme difficulty that they faced in obtaining information about the arrangements that taxpayers were making in offshore financial centres. As a result, the process of designing and approving the anti-tax haven law took several years and was hampered by uncertainty in bureaucratic circles as to whether the very wide powers that the Revenue were demanding could be reconciled with the constitutional liberties of the taxpayer. The chapter concludes by outlining some of the problems that the legislation later gave rise to in practice, and how those issues were resolved by the courts.

Offshore Tax Avoidance in the Pre-1914 Era Tax avoidance (onshore as well as offshore) is commonly assumed to be a distinctly modern development, which first manifested itself around the time of World War I (see, e.g. Stanley 1972: 8; Adams 1993: 394). This perception is misplaced, as medieval property owners were adept at avoiding taxes using corporations and trusts, and anti-avoidance laws can be traced as far back as the Magna Carta of 1217 (Harris 2006: 23). After the English Civil War, and with it the end of the feudal fiscal system, tax avoidance was kept in check by the state’s heavy reliance on excise duties and other forms of taxation that, while they may often have been criminally evaded, provided few opportunities for legal avoidance. But those taxes that could legally be avoided, such as the rudimentary inheritance taxes of the eighteenth and early nineteenth century, routinely were (Dunn 1956: vii, 34, 50–57, 70, 102–4, 125–6). It was only in the 1840s

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and 1850s that direct taxation in its present form began to take shape, with the permanent imposition of income tax in 1842 and the introduction of the first recognizably modern inheritance tax by the Succession Duty Act of 1853. The prevailing view is that, before 1914, both of these taxes were levied at such low rates that hardly anybody bothered with trying to avoid them, and that offshore tax planning was unknown (see, e.g. Masters 1992: 4016). One eminent historian has recently argued that, during Europe’s belle époque, not only was there little incentive to avoid tax but “the homogeneity of the financial environment” meant that there was practically no scope for cross-border regulatory arbitrage (Farquet 2021: 2, 5). In the British case, however, those contentions are not borne out by the available evidence. As early as 1851, a parliamentary committee heard testimony that numerous people were avoiding income tax, and aired rumours, albeit unsubstantiated, that British residents were using the neighbouring island of Ireland (which was not yet subject to the tax) for this purpose (House of Commons 1852: 53–6, 285–90). In the 1870s, one popular method of avoidance, which involved selling the coupons on foreign securities to overseas banks, was apparently organized on an almost industrial scale (Inland Revenue 1873: 36–7). This practice was legislated against in 1885, with what was probably the first British anti-avoidance law specifically aimed at cross-border transactions (Customs and Inland Revenue Act 1885: section 26(b)). In 1894, when the government introduced a new inheritance tax called estate duty, the tax was denounced in Parliament for being just as easy to avoid as the existing death duties were, including through the use of offshore trusts (Hansard 1894: Col. 200). And in 1906, when a parliamentary committee was convened to study the idea of imposing a graduated “super-tax” on high earners, one witness, who was in charge of supervising taxpayers in the City of London, said that in his opinion there were two distinct species of taxpayer: those who were sensitive to rates, and would not attempt to avoid or evade tax unless their overall burden went up significantly; and others who saw taxes as a cost of doing business that they were always looking for ways to reduce, regardless of what the published rate might be. Among the latter type, he explained, one well-established practice was to register a company in a foreign jurisdiction: this had a number of potential benefits, including the avoidance of income tax and capital duty (House of Commons 1906: 132, 136, 140).

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So although it may be intuitively obvious that the huge tax rises that accompanied World War I acted as a major spur to avoidance, it is important to emphasize that they only exacerbated a pre-existing phenomenon; they did not conjure it out of thin air. Moreover, far from being futile, regulatory arbitrage was positively encouraged by the structure of the direct tax system, which, from its inception in the Victorian period, was fundamentally “territorial” in nature. What this meant, in broad terms, was that income and assets were only taxable if they had some nexus with the United Kingdom that went beyond the mere fact of their belonging to a person who was resident or domiciled there. Hence, income from a British source was taxable, whether it belonged to a UK resident, or to a non-resident; whereas income from a foreign source was taxable only if it belonged to a British resident, and, even then, only if it was “remitted” (i.e. physically brought into the country). Similarly, UK inheritance tax was imposed on assets located in Britain, whether they belonged to a domiciled deceased, or to a non-domiciliary; but assets situated abroad were taxable only if they belonged to a UK-domiciled individual, and, even then, they escaped the tax if they were subject to a foreign trust (More 1935: 91). There were exceptions depending on the specific type of income or property that one was dealing with, but this was the basic position regarding investments in financial assets. Three logical consequences flowed from these elementary characteristics of the system. First, it incentivized investment in foreign securities, the income from which was tax free, assuming it was not remitted. Secondly, it incentivized keeping those foreign securities overseas, in an offshore investment account, so that the taxpayer had control over whether the income was remitted or not. Thirdly, it incentivized the establishment of offshore trusts, since foreign securities held by overseas trustees were not subject to inheritance tax. It is perhaps debatable whether these techniques truly constituted “avoidance,” because that was just the way that the system worked, but they were certainly coming to be thought of as such by the early years of the twentieth century (see, e.g. Spicer 1911: 112). It is also impossible to be certain how prevalent these practices were, as the Revenue did not compile statistics concerning them and there was a high degree of confidentiality surrounding people’s tax affairs. What we do know is that these strategies were well understood, both by those who might be inclined to make use of them and by the revenue authorities. Several experts who gave evidence to the 1906 parliamentary committee said that they knew of people moving their assets abroad to

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avoid income tax, and they predicted that this trend would accelerate if a super-tax were introduced (House of Commons 1906: 9–11, 17, 102, 168, 175). It may seem counterintuitive that the jurisdictions that they referred to in this context were France, Germany, and the United States, none of which are normally seen as tax havens today (and the expression “tax haven” is arguably anachronistic, as the earliest uses of that term seemingly date from the 1920s: see, e.g. Western Morning News 1927). Yet there was no federal income tax in the United States until 1913, and although both France and Prussia did tax investment income, in Prussia the tax was restricted to residents or to income originating there, while in France the impôt sur le revenu des valeurs mobilières exempted a large category of non-French securities (Seligman 1911: 251; Piketty 2018: 234). By warehousing their capital in one of these places, therefore, British residents could eliminate the tax that they would have paid if they had held the investments in the United Kingdom, but without exposing themselves to tax in the other jurisdiction. Between 1906 and 1914, countries like Belgium, Canada, and Switzerland also became known as good locations to open offshore investment accounts (Hansard 1909: Col. 1961; 1914b: Col. 1409; 1922: Col. 1829). It is worth noting, meanwhile, that because Britain did not tax non-residents on foreign-source income, the United Kingdom itself offered a favourable tax climate for people who lived overseas, and would continue to do so during the interwar period (House of Commons 1906: 142, 169, 173–4; Hollis and McKenna 2020, 167–8). If a single event really kick-started the tax avoidance industry in Britain, then it was the enactment of “super-tax” in 1909. Again, however, this was not so much a function of the rate, as it was a consequence of structure. Super-tax was only 2.5% to begin with, though bear in mind that this was a 43% surcharge on the ordinary income tax, and it was resented as class legislation by a good proportion of the 10,000 or so people who were rich enough to pay it. The Revenue’s records from that time supply ample evidence of people going out of their way to escape it, while the tax was so vulnerable to avoidance that it might as well have been voluntary.3 It could be eliminated altogether using simple, onshore, techniques; and although it is impossible to do justice to all of them here, one method 3 Precedent Book: sundry descriptions of tax avoidance schemes dated 1909–10 onwards, TNA, IR 83/64.

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does merit a brief explanation because of how it later intersected with offshore avoidance. The super-tax had a serious structural flaw, in that it was only levied on individuals, and not on companies. Before 1909, it was immaterial whether investments were owned by an individual, or by a (British) company, because both of them paid income tax at the same flat rate. If a company distributed its post-tax profits to individual shareholders, then they received full credit for the company’s tax, so it made no difference either way. From 1909 onwards, that ceased to be the case, because an individual in the super-tax bracket was liable for an extra 2.5%, whether he owned the investments outright or received a corporate dividend. A company that accumulated its profits without paying dividends, on the other hand, only paid income tax at the standard rate. Naturally, some shareholders were keen to extract these corporate profits, rather than leaving them trapped in a company, but this was unproblematic. The UK had no tax on capital gains until the 1960s, and the courts adopted a highly legalistic approach to the distinction between income and capital that made it easy to turn the (taxable) former into the (non-taxable) latter. At a basic level, the company could go into liquidation, or lend its earnings to the taxpayer; but more sophisticated techniques were soon developed, which relied on the company providing the individual with some item of “capital,” usually a redeemable share or debenture, which he could immediately convert into cash. So elegant, so foolproof was this strategy, that people understandably rushed to set up “one-man companies.” Already, by March 1914, the Revenue reckoned that they were losing £100,000 a year in super-tax due to companies accumulating their profits, roughly 3% of the total yield.4 They gave serious consideration to stopping this leakage then, but in the event, nothing was done about it until 1922. The £100,000 figure was dwarfed, in any case, by the Revenue’s losses from offshore avoidance. The Chancellor of the Exchequer, David Lloyd George, insisted when he introduced super-tax that fears of a capital exodus were illusory. “Capital, wherever it goes,” he told the House of Commons in 1909, “has got to pay this growing demand of the state for a contribution to public purposes, and, therefore, it is idle to talk about driving capital away.” This was a spurious line of argument, as 4 Note by Matthew Nathan (Chairman of the Board of Inland Revenue), 31 Mar 1914, TNA, IR 63/46.

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other members of the House pointed out. “What about Belgium?” one of them asked. “It is a very small country,” the Chancellor replied, “and I should be very much surprised to hear that there is really enough room in Belgium for all this huge capital to fly to” (Hansard 1909: Col. 1961). That may have been a neat turn of phrase, but it was beside the point: a Belgian investment account might contain securities issued by companies or governments anywhere in the world. And a Revenue report dated 1912 noted that although they had no hard data to substantiate stories of capital flight, anecdotal evidence suggested that it was taking place on a large scale.5 Just a few months later, the Revenue informed the Chancellor that the position was potentially on the brink of deteriorating sharply. The annual loss of income and super-tax attributable to people keeping their earnings offshore was forecast at £1 million in January 1914.6 Somewhat reluctantly, the Revenue advised abandoning the territorial system of taxation, at least as far as foreign investment income was concerned; and accordingly, with effect from April that year, British residents were deemed (unless they were non-domiciled) to be taxable in respect of “income arising from securities, stocks, shares, or rents in any place out of the United Kingdom,” regardless of whether they brought the earnings home or left them offshore (Finance Act 1914: section 5). This change from a “remittance basis” to an “arising basis” was no mere tinkering, the Revenue admitted, but represented “a radical alteration in the scope of the income tax.”7 Modern scholars sometimes conflate this pre-war extension of the British tax base with the numerous additional changes to the tax system that were made during World War I itself (see, e.g. Avery Jones 2004: 44, 51). But the archival record indicates that the decision was taken near the beginning of 1914, and certainly well before the war broke out.8 When Lloyd George announced the change to Parliament, on 4 May, he justified it by reference to the imperative to bring into charge “income that escapes taxation now owing to arrangements purposely

5 Note by Matthew Nathan, 19 Mar 1912, TNA, IR 63/51. 6 Note by Matthew Nathan, 31 Jan 1914, TNA, IR 74/42. 7 Note by Matthew Nathan, 19 Mar 1912, TNA, IR 63/51. 8 Note by Matthew Nathan, 31 Jan 1914, TNA, IR 74/42.

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made by men who are rich enough to leave their incomes abroad for reinvestment” (Hansard 1914a: Col. 89). Financial considerations were not exactly absent from the government’s motivation, because in January of that year the Treasury anticipated a budget deficit of £8.7 million and was urgently looking for additional revenue.9 The fact remains, even so, that this radical and unpopular innovation was rationalized, both in public and privately within the administration, as an anti-avoidance measure. A basic tenet of the British tax system, unchanged for more than 70 years, was unceremoniously cast aside, ostensibly in order to thwart offshore tax planning.

Taxpayers Shift from Offshore Investment Accounts to Offshore Holding Companies and Trusts In that respect, however, the 1914 law was singularly unsuccessful. What now occurred was a hybridization of two tried-and-tested technologies: the British one-man company on the one hand, and the offshore investment account on the other. Thus did the craze among Britons for setting up offshore holding companies begin. Corporations registered outside of the UK had a distinct advantage over their British counterparts. Not only were they not liable for super-tax, but assuming they were non-resident, which it was easy to arrange by appointing a few tame foreign directors, then they did not pay any income tax, either (unless they invested in British securities, in which case the tax was withheld at source). The British resident who owned the company would be taxable if he took a dividend, but he could get the benefit of the company’s profits without doing so, as noted above. The MP Laming Worthington-Evans, an expert in company law, warned Lloyd George what would happen during the debates on the 1914 Finance Bill: with nothing to prevent them, British taxpayers would transfer their foreign investments to companies registered in Canada or other low-tax jurisdictions (Hansard 1914c: Cols. 1582– 4). That way, they would not be affected by the change of law at all. A similar result could be achieved using an “opaque” foreign trust, and it was not uncommon to layer an offshore trust on top of an offshore

9 Memorandum of interview with Chancellor of the Exchequer, 29 Jan 1914, TNA, IR 63/46.

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holding company, as this secured exemption not merely from income and super-tax, but from inheritance tax as well.10 In an oblique fashion, the 1914 law change actually made offshore avoidance even easier. Before that date, few people seem to have considered it worthwhile to set up an offshore holding company, because it was usually just as efficient for income tax purposes to hold foreign investments in your own name. If you needed the overseas income in Britain, then you had to be careful not to trigger a taxable remittance, but in practice the remittance rules were porous. You could borrow money for your living expenses in the UK, for example, and later have the debt repaid abroad. After 1914, you had to transfer your foreign investments to a holding company, yet this transaction, in and of itself, supplied you with a ready-made mechanism for skirting the remittance rules. The way the “classic” offshore structure was set up was that the taxpayer would sell his foreign investments to a company incorporated overseas, not in exchange for cash, but for consideration paid in noninterest-bearing redeemable debentures issued by the offshore holding company. The purchase price would anticipate the future income from the investments, and, as that income accrued, the company would redeem tranches of the debentures, returning tax-free capital to the taxpayer. From 1915 onwards, this trick even worked with certain British government bonds, because the Treasury began issuing “war loan,” securities that were exempt from tax in the hands of a non-resident (Finance (No. 2) Act 1915: section 47). So Britain’s richest investors poured millions of pounds into these bonds, which they turned around and sold to their offshore holding companies, enabling them to extract a tax-free living from the British Exchequer.11 This latter variant of the scheme was almost comically abusive, and it is remarkable, in retrospect, that it was allowed to continue unchecked for more than 20 years. It is difficult to be sure how widespread the use of overseas holding companies was prior to 1922. The establishment of new offshore companies may have been inhibited to some extent by the capital controls that the government promulgated during World War I. Between November

10 Gerald Canny (Inland Revenue) to Edward Forber (Chairman of the Board of Inland Revenue), 3 Jul 1934, TNA, IR 40/4548. 11 Memorandum Prepared for Board’s Committee on Evasion of Income Tax and SurTax, Sep 1933, TNA, IR 40/4574.

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1917 and August 1919, the unauthorized export of capital was a criminal offence (Defence of the Realm Regulation 41D), though this was not in point if the relevant assets were already located overseas. What we do know is that onshore avoidance, including through one-man companies, exploded in magnitude during and immediately after the war. The Revenue told a Royal Commission in 1919 that the annual volume of tax-free capital distributions by British companies had grown tenfold over the preceding six years, from less than £4 million to almost £40 million (Royal Commission 1919: 714). With super-tax now at 30% (on top of 30% income tax), this drain on the government’s resources could no longer be ignored, and in 1922 an attempt was made to stamp out super-tax avoidance through one-man companies, by deeming profits that were “unreasonably” accumulated by a company controlled by five or fewer people to be apportioned among its shareholders (Finance Act 1922: section 21). But this legislation did not apply to foreign-registered companies at all, and that became one of their major attractions after 1922. Henceforth, a taxpayer who wished to avoid super-tax on his British income would transfer his British investments to an overseas company, or, alternatively, layer an offshore holding company on top of his existing one-man company. As the offshore company was not liable for super-tax, the apportionment rule misfired, and the net tax burden was limited to the 30% that British borrowers were obliged to withhold at the source. From 1922 on, therefore, offshore holding companies had a threefold appeal: exemption from income and super-tax on foreign income; exemption from income and super-tax on war loan interest; and exemption from super-tax on British income. Plus exemption from inheritance tax, if the company’s shares were held by an offshore trust. In the adjacent field of onshore avoidance involving fragmentation of incomes via contractual arrangements and trusts, legal historian David Stopforth has described the period from 1922 to 1936 as one of “halcyon days for the tax avoider” (Stopforth 1992: 88). A fortiori, it was the heyday of the offshore holding company. As in 1914, the government was amply warned in 1922 about the likely consequence of enacting half-baked anti-avoidance legislation, namely that it would not prevent avoidance, but merely divert it into different channels (see, e.g. Hansard 1922: Cols. 1828–9). It was not long before the Revenue came to recognize the wisdom of these warnings. They first

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became apprehensive about the proliferation of offshore holding companies in the early 1920s, when they began to suspect that British taxpayers were making extensive use of the Channel Islands (Jersey and Guernsey) as a tax haven. By 1926, they claimed to have identified “more than fifty” Channel Islands corporations that were probably holding companies for British residents.12 The story of the Revenue’s showdown with Guernsey and Jersey in the 1920s is a seminal one, to which it is impossible to do full justice here (for highly compressed published accounts see Johns 1983: 83–9; Picciotto 1992: 99–100; Likhovski 2007: 206–7; Scott 2022: 187–8). For present purposes, it is sufficient to note that the Revenue got drawn, for what were essentially extraneous political reasons, into attempting to impose a rather limited measure of tax harmonization on the Channel Islands, which would have included a blanket ban on the registration of companies there unless they were “bona fide beneficially owned by native islanders” (Johns 1983: 86). Thanks to formidable constitutional difficulties and determined resistance from the islands, by 1928 it was clear that this initiative was dead. What tends to be glossed over in the published accounts is that the Revenue did manage to reach a “gentlemen’s agreement” with the Channel Islands authorities in 1927.13 The deal was that the islanders would vet future applications for corporate registration, with a view to blocking “companies appearing to be formed to promote the avoidance of British taxation.”14 They also undertook to supply the Revenue with information (on a demand basis) about Channel Islands companies with British shareholders. This agreement failed to eliminate the holding company issue in the islands, not least because British taxpayers resorted to acquiring second-hand companies in order to evade the vetting procedure.15 But the pact was largely honoured, at any rate up until World War

12 Report of Sub-committee on Evasion of Super-tax Through the Medium of Private Companies, 3 Feb 1926, TNA, T 171/265. 13 P. L. Smith (H.M. Treasury) to J. Goldman (H.M. Treasury), 18 May 1954, TNA, T 233/1597. 14 Conclusions Reached at Conference Held at the Treasury, 14–15 Jul 1927, TNA, T 171/265. 15 Horace Martelli (Lieutenant Governor of Jersey) to C. M. Martin-Jones (Home Office), 30 Jun 1936, TNA, HO 45/24044.

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II, after which personnel changes seem to have caused it to lapse.16 And it was to some extent effective in deterring British taxpayers from setting up holding companies in Jersey and Guernsey, even if all that this ultimately meant was that they registered them elsewhere. The short-lived incorporation boom in the Isle of Man in the mid-1930s, for example, may have been a reaction to greater vigilance on the part of the Channel Islands registrars.17 By the end of the 1920s, however, it was obvious to the Revenue that trying to pressure individual tax havens into observing a self-denying ordinance where British taxpayers were concerned was not a scalable solution. There were too many different jurisdictions in play—around 40 would cross the agency’s radar over the following decade—and if the Revenue’s leverage over the Channel Islands was tenuous, then vis-àvis other havens it was non-existent. The interwar period was a golden age of competition between offshore centres, both within and outside of the British Empire. Sébastian Guex has shown how the cantons of the Swiss confederation vied with one another from the beginning of the twentieth century to offer tax incentives to so-called “domiciliary companies,” i.e. firms that were registered in the canton, but did not “engage in any productive or commercial activity” there (Guex 2022: 361). Liechtenstein’s Sitzunternehmungen regime, dating from 1926, and Luxembourg’s 1929 holding company law, each favouring domiciliary corporations with very low tax rates computed by reference to their capital base, are also well documented (see, e.g. Vernay 2021: 288–9, 294–9, 373–4). What is less well known is that two British possessions in North America also amended their laws at this time in a conscious bid to improve their appeal as tax havens. When Newfoundland re-introduced income tax in 1929, it capped the tax payable by qualifying “personal holding corporations” at $250 a year; while Canada’s smallest province, Prince Edward Island, enacted a more sophisticated “Domiciled Companies Act” in 1931, limiting their annual liability to $1500 (Income Tax Act 1929: section 2(s); Domiciled Companies Act 1931: section 2(b)). Canada had

16 A. R. Judge (Home Office) to Frederick French (Judge of Alderney), 26 Aug 1947, TNA, HO 45/24044. 17 Bertram Sargeaunt (Government Secretary of the Isle of Man) to Charles Markbreiter (Home office), 15 Mar 1936, TNA, IR 40/6160.

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imposed income tax at the federal level in 1917, yet this was unproblematic, partly because it was possible to organize Canadian companies so that they were non-resident for tax purposes, and partly on account of a 1918 law conferring an exemption on corporations whose business and assets were “situate entirely outside of Canada” (Statutes of Canada 1918: section 4). In 1936, Canada amended its laws to cater specifically to “non-resident-owned investment corporations,” which were taxed at half of the rate that applied to other Canadian companies (Statutes of Canada 1936: section 2). These North American havens were primarily angling for US patrons, but they also hooked plenty of British ones, including major landowners, bankers, press barons, industrialists and retailers, bestselling authors, and stars of the stage and screen.18 By 1936, the Revenue had identified 227 suspected holding companies for British taxpayers in Canada, as compared with a few dozen in the Channel Islands, around 100 in Luxembourg, up to 150 in Liechtenstein, and an indeterminate but significant number in Switzerland.19 They were also aware that “companies for [avoidance] of surtax have been registered in many unlikely places, such as Nairobi, Panama, Hong Kong, and Tangier.”20 As the decade progressed, other contenders emerged, notably Monaco—which, according to a 1938 report in a British financial journal, had “revised its…regulations in order to lure away holding companies from Liechtenstein and Switzerland” (Truth 1938: 78)—and Mandatory Palestine, which amended its company law in 1936 to facilitate registrations and was somewhat melodramatically portrayed by the Revenue as “the home of the tax dodger in the foreign sphere.”21 A 1938 article in The Times went as far as to claim that “this industry is so valuable to some of the countries concerned that their laws are altered to fit in with the provisions of the most recent English Finance Act,” although no actual instance of this was adduced and it is conceivable that the piece was 18 Collated dossiers pertaining to the transfer of investments to companies registered abroad, 1933–4, TNA, IR 40/4578A. 19 Note by W. E. Bickford (Inland Revenue), 12 Jul 1935, TNA, IR 40/4578A; C. L. Robinson (Inland Revenue) to J. Turnbull (Inland Revenue), n.d. [Sep 1936], TNA, IR 40/6160. 20 Note by G. H. Whybrow (Inland Revenue), 5 Jul 1933, TNA, IR 40/4576. 21 Cornelius Gregg (Inland Revenue) to Donald Somervell (Attorney General), 9 Jun

1938, TNA, IR 40/10841.

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planted by the Revenue with a view to inciting public indignation (The Times 1938: 16). Interestingly, none of the British colonies in the West Indies figured in the Revenue’s investigations at all, but we know that The Bahamas was heavily utilized by American taxpayers at this time and was the prime target of the anti-tax haven law that the United States enacted just one year after the United Kingdom did, in 1937 (US Congress 1937: 39–60; Revenue Act of 1937: Title II). In 1933, the Revenue explored the possibility of concluding a “gentlemen’s agreement” with Canada, analogous to the one that they had with the Channel Islands. The proposed arrangement was that, if the Canadian government gave them details of companies owned by British residents, then they would reciprocate “in respect of companies formed by Canadian nationals in the West Indies.”22 Yet the Canadian authorities rebuffed their approach, and as the Revenue had no intelligence on West Indian companies worth sharing, it is doubtful whether they were in earnest.23 At around the same date, the idea of an all-Empire convention for the exchange of tax information was mooted, but it was destined to remain a chimera.24 The Revenue were under no illusions, in any event, as to the likely result of such measures. “Restrictions on the registration in Canada of companies believed to be formed for the purpose of [avoiding] British taxation,” they spelled out in a 1933 report, “would, of course, lead to more being registered in Liechtenstein, Luxembourg, and the Swiss cantons, where they would be welcomed.”25

The Revenue’s Search for a Legislative Solution to Offshore Tax Planning From 1929 onwards, in fact, the Revenue had consistently held the view that offshore avoidance could only realistically be tackled from the other end, i.e. by amending Britain’s own laws to negate the tax advantages enjoyed by people with overseas holding companies. The fact that it 22 William Clark (High Commissioner in Canada) to James Thomas (Secretary of State for Dominion Affairs), 20 Jul 1933, TNA, IR 40/4342. 23 Norman Archer (Office of the High Commissioner in Canada) to Robert Wiseman (Dominions Office), 9 Nov 1933, TNA, IR 40/4342. 24 Third Meeting of Board’s Committee on Evasion, 7 Nov 1933, TNA, IR 40/4574. 25 Note by G. H. Whybrow (Inland Revenue): Appendix L, 5 Jul 1933, TNA, IR

40/4576.

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took them four years to formulate suitable legislation, and a further two and a half years to persuade ministers to sponsor it through Parliament, provides an indication of the tortuous technical and political conundrums that the issue created. When they first raised the prospect, the Revenue told the Labour government that cracking down on what they called this “evil” was not practical politics, as it would court unpopularity with the taxpaying classes: “we are reluctantly forced to the conclusion that nothing can be done about it until things get worse.”26 It was to be a Conservative Chancellor (albeit on behalf of what was nominally a coalition administration) who would eventually push the measures through, confirming that this was not a party political issue; though there is evidence that the decision to deal with it in 1936 was influenced to some extent by the financial demands of British rearmament.27 The Revenue believed that informed opinion would react badly to anti-avoidance laws aimed at offshore holding companies because they struggled to see how rules could be devised that were “really effective,” without simultaneously appearing “arbitrary,” and even “intolerably drastic.”28 This circumspection had two distinct but interrelated aspects, the second of which, relating to enforcement and specifically to the obtaining of information, is considered in the next section. The prior question, though, was that of the substantive tax charge. Until 1933, the main focus of the Revenue’s thinking was on constructive remittances: that is to say, on British residents who managed to repatriate the income earned by their holding companies in a tax-free fashion, often through the redemption of debentures as in the “classic” offshore scheme outlined above.29 That, after all, was the most conspicuously abusive feature of these structures. At the same time, however, the Revenue knew that taxing these capital remittances, but leaving untouched income that was merely accumulated offshore without being repatriated in non-taxable form, would leave open the possibility of indefinite tax deferral; and that would make a mockery, in some people’s eyes, of Parliament’s intention

26 Note sent to Financial Secretary to the Treasury, Jul 1929, TNA, IR 40/4576. 27 William Morrison (Financial Secretary to the Treasury) to Neville Chamberlain

(Chancellor of the Exchequer), 11 Feb 1936, TNA, T 171/318. 28 Note sent to Financial Secretary to the Treasury, Jul 1929, TNA, IR 40/4576. 29 Note by F. N. D. Preston (Inland Revenue), n.d. [1933], TNA, IR 40/4576.

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when it decreed in 1914 that foreign investment income was to be taxed on an arising basis. So there was an important issue of principle at stake, but there were also certain awkward practicalities, chief among which was the fact that the “classic” offshore structure represented only one potential avenue of avoidance. A Revenue memorandum of 1933 listed 17 then-known variations on the basic scheme, involving chains of companies, companies interleaved with trusts, covenants to pay annuities, and other non-standard features.30 Hence, any attempt to “enumerate the particular kinds of legal scaffoldings” to which liability was supposed to attach would only invite taxpayers to exercise their ingenuity in finding a means to restructure around it.31 And this problem was made all the more perplexing by the way in which the characterization of transactions under foreign law affected their British tax treatment, as the Revenue were acutely aware, having recently lost several important court cases relating to the taxation of American trusts.32 They contemplated short-circuiting these difficulties by enacting a broad-based anti-abuse rule nullifying “artificial and evasory [sic] transactions generally,” but this was rapidly discounted on political grounds because it would “introduce to a large extent the element of taxation at discretion.”33 By the beginning of 1934, the Revenue’s deliberations over the charging machinery had crystallized around two central concepts that would form the backbone of section 18 of the Finance Act 1936. The legislation was to apply whenever there was a “transfer of assets” that resulted in income becoming payable to a non-resident (i.e. an offshore holding company or the trustees of a foreign settlement), if an individual resident in the UK retained rights that gave him “power to enjoy” the income now accruing offshore.34 In those circumstances, the income would be taxable on the resident individual; and, in order to catch accumulations, the term “power to enjoy” was given an expansive meaning, so as to encompass, inter alia, not only an increase in the value of any assets owned by the resident (such as his holding company shares), but also 30 Analysis of Foreign Evasion Cases, n.d. [1933], TNA, IR 40/4578A. 31 Third Meeting of Board’s Committee on Evasion, 7 Nov 1933, TNA, IR 40/4574. 32 Note by Gerald Canny (Inland Revenue), 15 Jan 1936, TNA, T 171/318. 33 Note by F. N. D. Preston (Inland Revenue), n.d. [1933], TNA, IR 40/4576. 34 Report of the Evasion Committee: Appendix A, Feb 1934, TNA, IR 40/4574.

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the situation whereby he could “control the application of the income,” whether it was ultimately paid to him or to anyone else (Finance Act 1936: section 18(3)). Yet drawing the net this widely created problems of its own, as the Revenue acknowledged. It would certainly deal a blow to offshore holding companies, but it would also indiscriminately disincentivize all manner of legitimate overseas business, an own goal for a country that continued, until the United States overtook it during World War II, to be the largest source of foreign direct investment internationally.35 In order to alleviate this unpalatable consequence and forestall public criticism, the legislation was perceived to require an escape clause, and this came in the form of a “motive proviso.” As long as the taxpayer could convince a first-instance tribunal that “the transfer and any associated operations were effected mainly for some purpose other than the purpose of avoiding liability to taxation,” then he would fall outside of the section (Finance Act 1936: section 18(1)). The motive proviso was presented as a “beneficent provision” (Hansard 1936a: Col. 1324), but its inclusion caused significant controversy within the ranks of the bureaucracy itself. One senior Treasury official predicted that “Parliament is likely to object strongly to an inquisition into the state of a man’s mind”; while the head of the civil service stated that although he had “nothing but contempt” for tax avoiders—whom he sardonically dubbed “these patriots…who misuse the law”—nevertheless he did not consider that the legislature “would or should accept a proposal that the subject may be regarded as guilty of a wrong motive unless he can disprove it.”36 These fears delayed the introduction of the legislation for more than two years, but they proved to be largely groundless. As the Revenue subsequently reflected, when it finally came before Parliament, “section 18 aroused no criticism worth bothering about,” with only incidental amendments being insisted upon.37 Even less of a commotion was occasioned by section 24 (another long-term project of the Revenue’s), which was meant to eliminate the inheritance tax exemption for foreign movable 35 Gerald Canny (Inland Revenue) to Edmund Compton (H.M. Treasury), 10 Feb 1936, TNA, T 171/318. 36 Richard Hopkins (H.M. Treasury) to Warren Fisher (H.M. Treasury), 9 Dec 1935, TNA, T 171/318; Warren Fisher to Donald Fergusson (H.M. Treasury), 27 Feb 1935, TNA, T 171/318. 37 Note by Gerald Canny (Inland Revenue), 11 Feb 1938, TNA, IR 40/10841.

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property held by overseas trusts (Hansard 1936c: Cols. 855–60). And the Revenue’s initial experience with implementing section 18 was overwhelmingly positive: in early 1938, they reported that they had already used it to counteract “between 300 and 400 individual cases… In the majority of cases liability was admitted at the outset, and in many of these cases the foreign trust or company was wound up.”38 By then, however, a mere eighteen months since the section’s enactment, the Revenue were ruing the lengths to which they had previously gone to second-guess the parliamentary reaction to it. For taxpayers had taken the motive proviso, designed as an escape hatch for genuine trade, and widened it into a loophole through which clearly tax-driven structures could pass without hindrance. The tribunal had recently ruled, for example, that “quite general motives such as protection of capital and fear as to the political trends in this country or in Europe” were capable of trumping substantial and demonstrable tax savings.39 Unless this loophole was closed, the Revenue contended, more and more people would slip through, so in 1938 an amendment was tabled severely cutting down the proviso’s scope. From then on, the taxpayer had to be able to show either that transferring his assets abroad was justifiable as a “bona fide commercial transaction,” or that it had no tax motivation at all (Finance Act 1938: section 28). Neither this nor various other changes made to strengthen the section in the same year attracted any appreciable parliamentary opposition (Hansard 1938: Cols. 1601–16).

Problems Regarding Information and Enforcement, and the Subsequent Fate of the Legislation The elasticity of the original motive proviso was not the only problem that the Revenue faced when it came to enforcement. Since 1929, they had laid stress on the fact that imposing a tax charge on the owners of offshore holding companies would be futile unless the authorities were also granted far greater powers to compel taxpayers to disclose the existence of such arrangements.40 They realized that this would be 38 Ibid. 39 Ibid. 40 Note sent to Financial Secretary to the Treasury, Jul 1929, TNA, IR 40/4576.

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regarded as “inquisitorial,” but without it, British residents could simply fail to declare their offshore holdings, meaning that legal avoidance would morph seamlessly into unlawful evasion.41 As it was, the Revenue had encountered insuperable obstacles to the compilation of meaningful data on offshore avoidance, and they emphasized that the statistics that they periodically produced encapsulating their ongoing efforts to gauge its prevalence were inevitably “far from complete.”42 Until 1936, taxpayers could refuse to answer enquiries of this nature on the basis that such details were irrelevant to their tax liability; while the permissive incorporation laws in offshore centres made it “easy for [them] to conceal the facts.”43 Most of the Canadian provinces restricted the right to consult a company’s register to its own members or creditors, and the use of dummy shareholders was common, as was the holding of untraceable bearer shares.44 The Revenue corresponded with a Swiss lawyer who claimed to be the world’s leading expert on domiciliary corporations, but although he was a fount of knowledge on the history and rationale behind such companies, he was of no help whatsoever in relation to finding out who their shareholders were.45 In Liechtenstein, the Revenue observed, “there seem to be no permanent records and requirements are satisfied if the name of the new company and certain other particulars are chalked up on a blackboard,” while in Monaco they were disconcerted to be told that it was lawful to form a company without registering it at all.46 They were forced to rely on haphazard methods of intelligence gathering, such as thumbing through back issues of the Luxembourg Mémorial and sending an undercover agent to Monaco to

41 Ibid.; Note by W. E. Bickford (Inland Revenue), 12 Jul 1935, TNA, IR 40/4578A. 42 Memorandum Prepared for Board’s Committee on Evasion of Income Tax and Sur-

Tax, Sep 1933, TNA, IR 40/4574. 43 Note by G. H. Whybrow (Inland Revenue), 5 Jul 1933, TNA, IR 40/4576. 44 C. L. Robinson (Inland Revenue) to J. Turnbull (Inland Revenue), 10 Sep 1936,

TNA, IR 40/6160. 45 Wilhelmine Maier (George Wettstein Adv.) to Robert Erskine (H.M. Consul-General, Zurich), 30 Dec 1932, TNA, IR 40/6160. 46 C. L. Robinson (Inland Revenue) to J. Turnbull (Inland Revenue), 10 Sep 1936, TNA, IR 40/6160; Cecil Allanson (H.M. Vice Consul, Monaco) to T. D. Dunlop (Foreign Office), 12 Aug 1938, TNA, FO 371/21618.

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see what snippets he could unearth.47 When taxpayers got wind in 1933 of the fact that the Revenue were using existing sources of information like tax rebate claims in an attempt to match up offshore companies with named individuals, the practice of owning securities through nominees apparently escalated rapidly.48 As part of the package of measures passed in 1936, Parliament gave the Revenue the unprecedented authority to impose a fine of £50 a day (equating to thousands in modern money) on any taxpayer or adviser who, without reasonable excuse, failed to respond satisfactorily to enquiries about offshore tax planning (Finance Act 1936: Schedule 2, paragraph 6). But the Revenue soon stumbled up against the fact that a savvy and determined taxpayer would entrust his affairs to a solicitor, who could refuse even to confirm or deny for whom he was acting, pleading the dubiously reasonable excuse of legal professional privilege.49 By 1939, this was enough of a concern for the Revenue to prevail upon Parliament to sanction a qualified breach of privilege, whereby solicitors were required to reveal the names of their clients, if little else (Finance Act 1939: section 17). With this final embellishment, the law was at last found tolerably watertight. It survived without further amendment until 1969, when it was modified to respond to innovations in the trust law of the Cayman Islands that were designed to frustrate it, and to try to ensure that discretionary trusts were caught within its net (Finance Act 1969: section 33; Masters 1992: 4048–9). In 1939, there were still two major uncertainties surrounding the scope of the new law. The first concerned the status of the transferor (i.e. the person who moved his assets overseas), the second that of the beneficiary (the British resident who had “power to enjoy” the income belonging to the offshore company or trust). Concerning the first question, government representatives told Parliament when the legislation was introduced in 1936 that it was only supposed to catch a transferor who was already resident in the United Kingdom when he set up the structure. This meant that a non-resident who formed an offshore holding company and later 47 F. P. List (H.M. Consul, Luxembourg) to Henry Tom (H.M. Consul-General, Antwerp), 15 Sep 1936, TNA, IR 40/6160; W. E. Bickford (Inland Revenue) to Edgar Verity (Inland Revenue), 27 Jan 1939, TNA, IR 40/6160. 48 Note by G. H. Whybrow (Inland Revenue), 5 Jul 1933, TNA, IR 40/4576. 49 Opinion of John Shaw (Solicitor of Inland Revenue), n.d. [Jun 1936], TNA, IR

63/141.

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came to live in Britain would not be taxed on the company’s income (Hansard 1936d: Col. 435). As to the second question, ministers had affirmed that the law was only intended to apply if the beneficiary was also the transferor. That is to say if a British resident transferred his assets to an offshore company, but he personally did not have "power to enjoy" the income, then apart from his spouse, nobody else who was in a position to benefit could be taxed unless they actually received the earnings (Hansard 1936b: Col. 676). Neither of these ministerial assurances was honoured in practice. In 1948, the Revenue fought and won an important court case in which it was held that any British resident with the power to enjoy the offshore income could be taxed, even if he was a passive beneficiary who had no hand in creating the structure (Congreve v Inland Revenue 1948). Another case decided in 1967 established that it was immaterial if the would-be avoider was non-resident when he originally made the transfer; if he was now ordinarily resident, then he could be taxed regardless (Herdman v Inland Revenue 1967). In view of the clear statements that the government had previously made, Colin Masters is critical of the Revenue for bringing these cases, going as far as to assert that “the House of Commons was tricked into accepting this legislation, not appreciating how wide its scope would be” (Masters 1990: 1387). Archival sources do not substantiate this accusation, revealing that the Revenue’s opinion at the time was that neither of the aforementioned circumstances was covered by the law (though they appear to have resiled from that view quite soon afterwards).50 The position of non-resident transferors was raised again in 1938 when the Revenue explicitly advised against expanding the rules to cover such cases because “there is a considerable body of opinion that regards the coming of wealthy foreigners to this country as of such financial advantage that it should be encouraged by tax concessions.”51 Sensitivities of that kind may help to explain why the Revenue did not see fit to clarify the 1936 law by sponsoring amending legislation but were content to test its boundaries via litigation with individual taxpayers. 50 Notes on Amendments and New Clauses (Committee Stage): p. 18; Notes on New Clauses, Clauses of the Bill and Amendments (Report Stage): p. 33; House of Lords Brief: p. 5, Jun–Jul 1936, TNA, IR 63/142. 51 Gerald Canny (Inland Revenue) to John Woods (H.M. Treasury), 1 Apr 1938, TNA, IR 40/10841.

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One authority on British tax law suggested in 1955 that legislation was often left in an unsatisfactory state because of “shortage of parliamentary time,” and “the natural reluctance of chancellors, and of the Inland Revenue, to alter anything unless they have to” (Wheatcroft 1955: 222). Yet as noted below, the Revenue lost no time in amending the rules once the tide of judicial sympathies turned against them, and it is not inconceivable that other factors played a role. There is evidence that as early as 1936, the Revenue were in practice tailoring their administration of the law according to what they perceived were the “merits” of particular cases, and further research could usefully be conducted into how far (if at all) the rules were consciously applied in a discriminatory fashion to accommodate the wants of “wealthy foreigners.”52 When cases did reach the courts, the responsibility for interpreting the legislation lay with the judiciary. The legal historian Robert Stevens influentially argued that the mid-twentieth century was a period of “substantive formalism” in judicial attitudes, with the courts generally unwilling to look beyond the literal wording of the statute (Stevens 1978: 319–402). Yet whereas Stevens chided the judges for their “destructive” outlook—which, he claimed, “undermined” bipartisan policies of redistributive taxation by “developing loopholes” in the law—if anything the opposite was true where the 1936 legislation was concerned, as the literal approach to construction overwhelmingly favoured the Revenue (Stevens 1978: 366, 395). Colin Masters may object to the Revenue’s behaviour in taking the Congreve and Herdman cases cited above on the basis that it amounted to a breach of faith, but he is forced to concede that both judgments were “supported by the grammar of the section” (Masters 1992: 4027, 4064). As administered by the Revenue with the sanction of the courts, the 1936 legislation came to constitute a formidable deterrent against offshore tax planning by British residents. One French jurist, a prominent proponent of tax havens, was not speaking out of turn when he opined in 1977 that “the British have little need of a general law against ‘abuse’ if provisions such as this, directed against specific forms of tax avoidance, are so widely drawn” (Chambost 1978: 186). But that was not to be the end of the story, for the most remarkable thing about the 1936 law is that it was interpreted in a completely contradictory way by

52 Note by Edgar Verity (Inland Revenue), 10 Nov 1936, TNA, IR 40/4524.

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two successive generations of judges, such that within a few months of Chambost’s remark, the legal landscape had been turned on its head. In 1966, Britain’s highest court had granted itself the authority to depart from its previous decisions, and in 1979 the justices used this power to reverse the ruling that their predecessors had laid down in 1948. They now determined that, contrary to long-established practice, no tax was chargeable unless the transferor and the beneficiary were the same person (Vestey v Inland Revenue 1979). A similar fate later befell the 1967 ruling relating to offshore structures created by non-residents (Willoughby v Inland Revenue 1997). In both instances, the legislature acted swiftly to close the loopholes that these judgments were seen to open up (Finance Act 1981: section 45; Finance Act 1997: section 81). Yet at the same time, Parliament took the opportunity for a wider overhaul of the rules, notably by cutting down the scope of the Revenue’s discretion and by creating a new let-out for nondomiciliaries (in relation to whom the Revenue had acknowledged since the 1930s that the effect of the section could sometimes be disproportionately “penal”) (Finance Act 1981: section 46).53 So while the direct statutory successor to the 1936 law is still in force today, it no longer has quite the fearsome reputation that it did in the 1970s. The deeper motivations underlying these tectonic shifts of judicial sentiment remain surprisingly obscure. In 1979, the court was unabashed about the fact that it was reversing its earlier decision on policy grounds, declaring that the Revenue had been using the legislation in ways that were “arbitrary, potentially unjust, and fundamentally unconstitutional,” incidentally the self-same fears that had delayed its enactment almost half a century earlier (Vestey v Inland Revenue 1979: 987). The justice who delivered the ruling later confessed that it weighed on his conscience: “I sometimes wake up at night and ask myself, was it right that I should have decided the case in a way that meant the [litigants avoided] millions in tax?” (Gillard 1987: 257). In contrast, the judge who decided the 1997 case said that he was only interested in “the natural and plain meaning of the words,” though he drew attention to the fact that the law had already been changed by the time he passed judgment (Willoughby v Inland Revenue 1997: 1077). Historian of taxation Assaf Likhovski has argued that explanations of judicial decision making that focus exclusively

53 Note of discussion with Mr Verity, 24 Nov 1936, TNA, IR 40/4524.

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on “internal legal factors” are inadequate, and that we know too little about the overriding question of “why judges viewed tax avoidance in a certain way at a certain time” (Likhovski 2004: 957, 959). The more pro-Revenue approach of the earlier generation of judges is sometimes ascribed to “patriotism,” yet this seems speculative and not altogether convincing (Murray 2012: 16). The extreme swings of the pendulum in judicial attitudes to the 1936 law thus remain fertile territory for future research along the lines that Likhovski advocates.

References Adams, Charles. 1993. For Good and Evil: The Impact of Taxes on the Course of Civilization. Lanham, MD: Madison. Avery Jones, John. 2004. Taxing Foreign Income from Pitt to the Tax Law Rewrite: The Decline of the Remittance Basis. In Studies in the History of Tax Law, Vol. 1, ed. John Tiley, 15–56. Oxford: Hart. Chambost, Edouard. 1978. Using Tax Havens Successfully, trans. Crawley, Thomas. London: Institute for International Research. French edition: Chambost, Edouard. 1977. Guide des paradis fiscaux. Paris: Tchou. Congreve v Inland Revenue. 1948. 13 May. House of Lords. All England Law Reports, Vol. 1: 948–55. London: The Law Journal. Customs and Inland Revenue Act. 1885. 6 Aug. Acts of the Parliament of the United Kingdom of Great Britain and Ireland. Ch. 51. London: HMSO. Defence of the Realm Regulation 41D. 1917. 27 Nov. In The London Gazette, No. 30442: 13377–8. London: HMSO. Domiciled Companies Act. 1931. 7 Apr. Acts of the General Assembly of Prince Edward Island. 41st Gen. Ass., 4th Sess. Ch. 1. Charlottetown: Frank L. Dillon. Dunn, LeRoy. 1956. A History of Inheritance Taxation in England. Ph.D. thesis, London School of Economics. Farquet, Christophe. 2021. Attractive Sources. Tax Havens’ Emergence: Mythical Origins versus Structural Evolutions. Social Science Research Network. https:// doi.org/10.2139/ssrn.3897377. Finance Act. 1914. 31 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Ireland. Ch. 10. London: HMSO. Finance Act. 1922. 20 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 17. London: HMSO. Finance Act. 1936. 16 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 34. London: HMSO.

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Finance Act. 1938. 29 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 46. London: HMSO. Finance Act. 1939. 28 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 41. London: HMSO. Finance Act. 1969. 25 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 32. London: HMSO. Finance Act. 1981. 27 Jul. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 35. London: HMSO. Finance Act. 1997. 19 Mar. Acts of the Parliament of the United Kingdom of Great Britain and Northern Ireland. Ch. 16. London: HMSO. Finance (No. 2) Act. 1915. 23 Dec. Acts of the Parliament of the United Kingdom of Great Britain and Ireland. Ch. 89. London: HMSO. Gillard, Michael. 1987. In the Name of Charity: The Rossminster Affair. London: Chatto & Windus. Guex, Sébastien. 2022. The Emergence of the Swiss Tax Haven, 1816–1914. Business History Review 96 (2): 353–372. Hansard. 1894. 17 Jul. HC Deb. 4th Ser., Vol. 27. London: HMSO. Hansard. 1909. 12 May. HC Deb. 5th Ser., Vol. 4. London: HMSO. Hansard. 1914a. 4 May. HC Deb. 5th Ser., Vol. 62. London: HMSO. Hansard. 1914b. 14 May. HC Deb. 5th Ser., Vol. 62. London: HMSO Hansard. 1914c. 13 Jul. HC Deb. 5th Ser., Vol. 64. London: HMSO. Hansard. 1922. 29 May. HC Deb. 5th Ser., Vol. 154. London: HMSO. Hansard. 1936a. 20 May. HC Deb. 5th Ser., Vol. 312. London: HMSO. Hansard. 1936b. 15 Jun. HC Deb. 5th Ser., Vol. 313. London: HMSO. Hansard. 1936c. 16 Jun. HC Deb. 5th Ser., Vol. 313. London: HMSO. Hansard. 1936d. 1 Jul. HC Deb. 5th Ser., Vol. 314. London: HMSO. Hansard. 1938. 27 Jun. HC Deb. 5th Ser., Vol. 337. London: HMSO. Harris, Peter. 2006. Income Tax in Common Law Jurisdictions: From the Origins to 1820. Cambridge: University Press. Herdman v Inland Revenue. 1967. 19 Apr. Court of Appeal in Northern Ireland. Northern Ireland Law Reports, Vol. [1968]: 74–95. Belfast: Incorporated Council of Law Reporting for Northern Ireland. Hollis, James, and McKenna, Christopher. 2020. The Emergence of the Offshore Economy, 1914–1939. In Capitalism’s Hidden Worlds, ed. Kenneth Lipartito and Lisa Jacobson, 157–177. Philadelphia, PA: University of Pennsylvania Press. House of Commons. 1852. First Report from the Select Committee on the Income and Property Tax. Minutes of Evidence. PP 1852 IX, No. 354. London: HMSO. House of Commons. 1906. Report from the Select Committee on Income Tax. Minutes of Evidence. PP 1906 IX, No. 365. London: HMSO.

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Income Tax Act. 1929. 1 June. Acts of the General Assembly of Newfoundland. Ch. 36. St. John’s: David R. Thistle. Inland Revenue. 1873. Sixteenth Report of the Commissioners of Her Majesty’s Inland Revenue, for the Year Ended 31 March 1873. C. 844. London: HMSO. Johns, Anthony. 1983. Tax Havens and Offshore Finance: A Study of Transnational Economic Development. London: Pinter. Likhovski, Assaf. 2004. The Duke and the Lady: Helvering v Gregory and the History of Tax Avoidance Adjudication. Cardozo Law Review 25 (3): 953– 1018. Likhovski, Assaf. 2007. Tax Law and Public Opinion: Explaining IRC v Duke of Westminster. In Studies in the History of Tax Law, Vol. 2, ed. John Tiley, 183–222. Oxford: Hart. Masters, Colin. 1990. The Avoidance of Tax on Income, Profits and Gains. Ph.D. thesis, University of Southampton. Masters, Colin. 1992. Tax Avoidance. London: Sweet & Maxwell. More, Jasper. 1935. The Saving of Income Tax, Surtax and Death Duties. London: Butterworths. Murray, Rebecca. 2012. Tax Avoidance. London: Sweet & Maxwell. Picciotto, Sol. 1992. International Business Taxation: A Study in the Internationalization of Business Regulation. Cambridge: University Press. Piketty, Thomas. 2018. Top Incomes in France in the Twentieth Century: Inequality and Redistribution, 1901–1998, trans. Ackerman, Seth. Cambridge, MA: Belknap. French edition: Piketty, Thomas. 2001. Les hauts revenus en France au XX e siècle: Inégalités et redistributions, 1901–1998. Paris: Grasset. Revenue Act. 1937. 26 Aug. United States House of Representatives. Pub. Law No. 75-377, 50 Stat. 813. Washington, DC: U.S. Govt. Printing Office. Royal Commission. 1919. Royal Commission on the Income Tax: Fourth Instalment of the Minutes of Evidence. Cmd. 288/4. London: HMSO. Scott, Peter. 2022. A Fiscal Constitutional Crisis: Tax Avoidance and Evasion in Inter-war Britain. English Historical Review 137 (584): 170–197. Seligman, Edwin. 1911. The Income Tax: A Study of the History, Theory, and Practice of Income Taxation at Home and Abroad. New York: Macmillan. Spicer, Ernest. 1911. 21 Jan. Some Remarks on Income and Super-Tax and its Legal Evasion. The Accountant 44, No. 1885: 105–17. Stanley, Oliver. 1972. Taxology: The Perpetual Battle of Wits between the Inland Revenue and the Taxpayer. London: Weidenfeld & Nicolson. Statutes of Canada. 1918. 24 May. 13th Parlt., 1st Sess. Ch. 25. An Act to Amend the Income War Tax Act, 1917. Ottawa: Joseph de Labroquerie Taché. Statutes of Canada. 1936. 23 Jun. 18th Parlt., 1st Sess. Ch. 38. An Act to Amend the Income War Tax Act. Ottawa: Joseph Oscar Patenaude.

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Stevens, Robert. 1978. Law and Politics: The House of Lords as a Judicial Body, 1800–1976. Chapel Hill, NC: University of North Carolina Press. Stopforth, David. 1988. A History of the Anti-Avoidance Legislation Applying to Settlements for Income Tax Purposes. Ph.D. thesis, University of Glasgow. Stopforth, David. 1992. 1922–36: Halcyon Days for the Tax Avoider. British Tax Review 37 (2): 88–105. Succession Duty Act. 1853. 4 Aug. Acts of the Parliament of the United Kingdom of Great Britain and Ireland. Ch. 51. London: HMSO. The Times. 1938. 24 Mar. Tax Avoidance. How Incomes Are Relieved: The Arts of the Dodger. No. 47,951: 15–16. Truth. 1938. 20 Jul. Home of Escaping Capital. Truth124 (3228): 78–9. US Congress. 1937. 18 Jun. Hearings before the Joint Committee on Tax Evasion and Avoidance. 75th Cong., 1st Sess. Washington, DC: US Govt. Printing Office. Vernay, Alain. 2021. Tax Havens, trans. Hollis, James. Nottingham: Edward Ludlam. French edition: Vernay, Alain. 1968. Les paradis fiscaux. Paris: Seuil. Vestey v Inland Revenue. 1979. 22 Nov. House of Lords. All England Law Reports, Vol. 3: 976–1007. London: The Law Journal. Western Morning News. 1927. 2 Mar. Tax-Dodgers’ Haven. No. 20,886: 3. Wheatcroft, George. 1955. The Attitude of the Legislature and the Courts to Tax Avoidance. Modern Law Review 18 (3): 209–230. Willoughby v Inland Revenue. 1997. 10 Jul. House of Lords. All England Law Reports, Vol. 4: 65–75. London: The Law Journal.

CHAPTER 15

Tax Evasion as Seen by French Tax Administrations from the 1920s to the 1970s: Pragmatism in Action Béatrice Touchelay

The archives of the French financial and tax authorities and directorates kept at the Service des archives économiques et financières de la France (SAEF) near Paris show how those agents involved in tax collection and control perceived and assessed deliberate evasion of income tax (personal and corporate income tax) from its introduction in July 1914 to the strengthening of tax compliance capacities in the 1970s. Contrary to what one might think, since we are dealing with the domain of secrecy and concealment, these archives increase the knowledge of tax evasion. They enable us to understand why the authorities in charge of filling the State’s coffers and enforcing tax liabilities considered that tax evasion was endemic and how they reacted to the situation. They also enable

B. Touchelay (B) University of Lille, Lille, France e-mail: [email protected]

317 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_15

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us to understand why fraud persisted, even though the remedies had been known since the 1930s, and to explain the attitude of most political leaders, who accepted the situation and marginalised the critics, who were often located on the left of the political spectrum. The inter-war period was marked by these tensions. Tax officials in the field had few means of enforcing tax liabilities. The need for rearmament led to the introduction of reforms that were implemented during the Occupation of France by the Third Reich, between 1940 and 1944. The fall in economic activity, the generalisation of the black market, and the patriotic basis of the refusal to pay taxes characterise the first period, which we will deal with in the first part of this paper (1. Propaedeutic). After the troubles of the Liberation, the re-establishment of democratic institutions and the massive involvement of the state in the reconstruction and organisation of the social state forced a reaction (2. Between resistance and accommodation). The creation of the General Tax Directorate (DGI) in 1948 to improve cooperation between tax authorities, introduce a reform of direct taxation, and strengthen compliance checks, gradually made the system more efficient. However, the system remained deeply unequal, with income from work that could not be hidden being the most heavily taxed, while part of the income from capital escaped taxation. The increase in tax revenues and tax adjustments were more the result of the economic and social transformations of the 1950s and 1960s than of the rise in funding allocated to the fight against fraud. The decrease in the number of self-employed individuals whose tax returns could not be satisfactorily verified made it possible to concentrate compliance checks on the accounts of taxpayers with real profits. The cross-checking of information on taxpayers and the exemplary nature of inspections reduced tax evasion and improved tax yields, but without making them more equitable. With the help of economic growth, some 50 years after its introduction, direct taxation had become more accepted. The financial and tax departments had also come to terms with the fact that its yield did not depend solely on the tax rate or the efficiency of the auditors, but on tax morality, which they considered to be rather deficient in France.1 1 Reports of the Inspection des Finances. 1959. Thematic reports on “tax reform”. Report by Inspector General Auboyneau on reform of personal income tax, 13 March 1959. Service des archives économiques et financières de la France (SAEF) Savigny-leTemple, Seine et Marne, France. 4A-0002365.

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Propaedeutic Between Two World Wars The introduction of new direct taxes between the two world wars (income tax in 1914, schedular tax in 1917, trade tax in 1920) led to a complex system (Neurisse 1996; Nizet 1991). The inadequate training of tax officials, the rise of unscrupulous tax consultancies, the absence of uniform accounting rules, and the lack of resources allocated to the enforcement services were characteristic of the period. Ministerial instability blocked any reform and the budgetary difficulties linked to the war debts and the crisis of the 1930s were not resolved. Large-scale capital flight completed the picture (Farquet 2012). However, it was also during this period that the remedies to be introduced to improve the tax yield and make it fairer were defined. Some were even tested on an experimental basis, but the situation did not improve. Tax administrations did not receive the funds they needed to do their job. Although tax revenue was low and there were several scandals, the political authorities took no action (Guex 2007). The Ideas Are in Place: The National Bloc The period when the National Bloc was in power (1919–1924) is particularly revealing of the intensity and immediate sterility of the debates on tax evasion. While the right-wing coalition had a strong incentive to fight against fraud, it did so in a profoundly unequal way, and the optional flatrate system was maintained. Tax dualism was confirmed by distinguishing between taxpayers who kept their accounts and negotiated the amount of tax to be paid and the rest. In 1920, budgetary needs were glaring. At the end of April, the government indicated that a “considerable tax burden was going to be imposed on the country” and sought to strengthen the resources of the authorities in charge of collecting it.2 There was much to do, since the

2 Tax reforms. Parliamentary projects and discussions (1919–1920). Chamber of Deputies annexed to the minutes of proceedings (PV) of the sitting of 29 April 1920. Bill to allocate funds to strengthen the administrations responsible for tax assessment and collection and financial control, presented by Paul Deschanel, President of the Republic, and Frédéric François-Marsal, Minister of Finance, 55 p. SAEF B 33 971.

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former Minister of Finance during the War, Alexandre Ribot, indicated to the Senate, the upper house of the French parliament, that “the general tax on income is not collected and that one does not establish the tax roles”.3 He recognised that “the situation was turning into a scandal”. Several reform proposals were then put forward. To improve “tax justice”, the socialist deputy Vincent Auriol took up the idea of a tax register, an idea first introduced in 1866.4 Such a register would make it possible to centralise all available information on taxpayers and create a tax archive. The idea re-emerged when the coffers were empty, but was opposed by right-wing majorities. The two administrative commissions in charge of reorganising the French fiscal Régies —i.e. the tax authorities (one for each form of tax: direct contributions (CD) on corporate earnings and income from work; indirect contributions (CI) on transactions; contributions on the registration of official documents, named Registration), mentioned the register again in 1921.5 The following year, the director-general of the CD defended it.6 The Inspectorate of Finance was in favour of encouraging the Régies to collaborate more and improve enforcement.7 The reform aroused the hostility of the tax authorities, who were not ready to collaborate, due to a lack of civil servants. Tax evasion was confirmed, as the crisis increased the budget deficit. In June 1921, Henry Chéron, a senator from the Calvados region and several times a minister, declared that it was urgent to stop the propagation of the idea of a “purely voluntary tax, paid by the naive or

3 Examination of provisional credits applicable to the first quarter of 1920. Caisse des dépôts et consignation. Supervisory Commission—Documents (1921–1926). SAEF B 43 148. 4 Speech by Auriol to the Chamber of Deputies, 12 April 1920. Tax reform projects (1920–1924). SAEF B 33 971. 5 Unsigned text of 24 June 1921. Caisse des dépôts et consignation. Supervisory

Commission, Directorate General of Registration. SAEF B 43 148. 6 Measures to be taken against tax fraud and evasion. Execution of the ministerial circular of 3 February 1922, note from the Director-General of CD to the Minister of Finance, 28 February 1922, p. 15. SAEF B 43 157. 7 Reports of the Inspection des Finances. Report on the work carried out during the year 1920, p. 39. Work of the CD, pp. 8–13. SAEF 4 A 1.

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the clumsy”.8 The urgency was confirmed when parliamentarians refused to vote for any new tax until the yield from existing levies had been improved.9 In response, the Minister of Finance, Paul Doumer, gave an administrative commission the task of investigating the dysfunctions and proposing remedies.10 The commission concluded that it was necessary to strengthen the collaboration between Registration and the CD in order to improve the verification of income tax returns.11 It proposed that “special compliance teams” should be set up in the major cities, made up of CD agents working from Tax Office premises. These compliance teams would allow the Registry to keep a “general directory” containing “all the information” required by the CD. These pioneering proposals could not be put into practice because of the budgetary restrictions of the time. Even though the estimates varied, the reality of tax evasion was proven.12 In 1923, the centre-right deputy for the Seine, Maurice Bokanowski, estimated the amount of undeclared income at eight billion francs.13 Vincent Auriol put it at between eight and 11 billion francs, compared to the 3.6 billion francs of declared income.14 The CD authorities put the “omissions” at two or three billion. Other figures provided further evidence. Thus while 558,000 people had been subject to general income tax in 1918 and 630,000 in 1919, there were only 528,971 in 1920. The concealments were obvious. In 1921, Maurice Deligne, Director General of the Registration, linked the sharp increase in tax 8 Annexe to the minutes of the meeting of 7 June 1921, report presented on the draft

budget for 1921. Caisse des dépôts et consignation. Supervisory Committee. Senate. SAEF B 43 148. 9 Tax legislation. Measures to be taken against tax fraud. Central Division, n° 1–79. Note from Deligne to the directors, 28 January 1922. SAEF B 43 157. 10 Studies on the merger of the CD and Enregistrement (registration) departments. The commission was created by the order of 21 June 1921. Caisse des dépôts et consignation. Supervisory Committee. SAEF B 43 148. 11 Idem. Report to the President of the Republic on the administrative reorganisation, Paul Doumer, Minister of Finance, 12 October 1921, conclusions of the work of the first sessions of June and July 1921, submitted to the Minister on 5 August. 12 Idem. Senate. Annexe to the minutes of the session of 7 June 1921, report presented by Henry Chéron on the draft budget for 1921. 13 Budget financial measures. Savings and new tax resources (1923–1924), DirectorateGeneral of the CD. Note sent to the Senate Finance Committee on 6 March 1924, speech to the Chamber on 22 February 1923. SAEF B 33 995. 14 Idem. Speech to the Chamber on 5 March 1923.

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evasion to “recent rate increases” and stated, “any crackdown required more and more work”.15 Moreover, the Régies were going through a serious recruitment crisis and many posts (660 out of 4679 on 1 November 1921) were left vacant. By way of explanation for this crisis, he pointed to the inadequacy of “the salaries of the agents” in charge of checking tax returns and searching for tax evasion (on the reforms of the tax administration: Tristram 2005). However, the tax authorities were considered responsible for the inefficiency of tax collection. In January 1922, Charles de Lasteyrie, Minister of Finance, ordered an internal investigation to find out the reasons for the malfunctions and to propose remedies.16 Deligne presented the results of the inquiry.17 In explaining the weakness of the fight against tax evasion, he referred to the inadequate cooperation between the Régies, the superficial nature of the accounting checks, and the weakness of the regulatory and legislative support. He denounced the numerous “supplementary tasks” (sequestration operations or war profits files) carried out by the “senior employees of the Régies ” in order to obtain “additional profits”. He suggested encouraging the enforcement officers by awarding them a “discovery bonus” paid from the fines and penalties recovered. In October 1922, these observations led to the decision to group the CD and Registration agents together in an auditing service that would produce the necessary documentation on taxpayers. This amounted to the creation of the tax record and the “general directory of registrations and declarations”.18 The following month, the idea of a coupon book formulated by the union of CD enforcement agents as a means of combatting the concealment of securities and income from movable property was discussed in 15 Idem. Directorate General of Registration. Reactions to the proposal to create a

financial study and organisation department were presented by senators Albert Sarraut and Anatole de Monzie on 22 April 1920, signed by the Director-General, 23 November 1921. 16 Tax legislation. Measures to be taken against tax fraud. Central Division, n° 1–79. Notes for discussion by the Senate Finance Committee, 10 March 1924. Note from Deligne to the Minister of Finance, 28 February 1922, p. 15. SAEF B 43 157. 17 Idem. Mesures propres à améliorer le rendement de l’impôt et revenus publics recouvrés par l’administration, circular addressed to the directors of the departments, signed by Deligne. Directorate General of Registration. 13 February 1922, p. 37. 18 Idem. Note from the Directorate General of CD and of the Registration responding to the request for information on legislative and regulatory measures adopted since 1 January 1922, to improve the tax base and collection, 14 May 1923.

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the Chamber.19 The deputies reinforced the coercive nature of the initial project. They made coupon holders subject to specific formalities with the CD in the event of a change of address and obliged them to keep their booklet for five years from the last entry.20 The discussions led to the introduction, in the Act of 22 March 1924, of the coupon slip, rather than the coupon booklet. The terms under which the law was implemented were defined by the decree of 16 September 1924, and adopted by the Cartel des gauches, and the slip was suspended and cancelled in 1925.21 To compensate for the authorities’ inability to effectively verify profit declarations, the lump-sum system was renewed at the end of the National Bloc’s mandate. By limiting the accounting obligations of 1.6 million small businesses and industries as much as possible, this system avoided a multitude of low-value inspections by the tax authorities. The system was not modified until the law of 4 April 1926. The preparations for legislative elections increased the interest of deputies in the tax issue. Without offending the business community, the National Bloc had to show that it had fought tax evasion effectively.22 It was confronted with the budgetary imperative. By providing for major funding restrictions and suspending all civil servant recruitment for four months, the law of 22 March 1924 put paid to the remedies proposed during the previous two years. It accentuated the lack of personnel assigned to enforcement, when there were only 982 inspectors

19 Taxation. Tax legislation. Tax evasion. Coupon slips and booklets. Directorate

General of CD. Note on the coupon book, 26 January 1923. Intervention by Deputy Bokanowski in the Chamber, session of 13 November 1922, Journal Officiel (JO), Parliamentary debates, p. 3088. SAEF B 57 744. 20 Idem. Note on the coupon book, unsigned, 26 January 1923. 21 Carte d’identité fiscale Projets de décrets loi (1933–1934). The coupon slip was

suspended by the decree of 22 February 1925, and then repealed by the law of 13 July 1925. SAEF B 33 994. 22 Tax legislation. Measures to be taken against tax fraud. Directorate General of Registration, Central Division. Folder addressed to the President of the Council, communication made on behalf of the Minister in response to the Senator for Aube, Victor Lesaché, requesting a complete list of repressive texts voted since 1919, 23 February 1926. SAEF B 43 157.

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for 1.76 million companies, and accelerated the exodus of qualified officials to private consultancy firms.23 The National Bloc had proved itself incapable of fighting tax evasion and its successors were no better. An Uncompromising Assessment in 1929 In 1928, and again in 1929, Henri Baudouin-Bugnet, Director General of CD, presented the results of the first ten years of income tax.24 The results were damning: “the general tax mainly hits the products of labour”, which could not be hidden, undermining the “very basis of a system inspired by principles of justice and equity”. Between 1922 and 1928, the number of taxpayers declaring income from work more than doubled, while the number of other “uncontrollable or difficult to verify” schedules stagnated. The amount of income declared followed the same trend. The tax evasion that was rife among certain liberal professions was particularly glaring, since 60% declared that they earned less than 30,000 francs in Paris and “for some, the gain is so derisory that it is inconceivable that they could practise the profession or simply live”. For industrial and commercial profits, the threshold of 50,000 francs, above which accounting was required and below which companies were exempted, led to “concealment and flagrant inequalities”. Thus, out of 1,545,460 businesses and industries, only 67,185 were taxed on their real profits and paid the largest share of the four billion in taxes in this category in 1927. If “tax morality is better and the controller is better armed” for the largest businesses, the same was not true of the largest taxpayers for whom the general tax (schedule and securities, etc.) “tends to take on the appearance of a voluntary contribution despite the tightening of controls on ex officio taxation”. Baudouin-Bugnet indicated that the “considerable efforts” of the tax authorities in 1928 to verify accounts brought in more than five billion francs’ worth of taxes, but such efforts could not be maintained. He concluded, “that the legal impossibility of verifying declarations makes and in the future will make even more intolerable the 23 Idem. Examination of the articles of bill n° 6980, having for its object the realisation of savings, the creation of new fiscal resources and various measures of a financial nature, articles voted by the Chamber of Deputies, 29 February 1924. Text sent to the Senate Finance Committee on 6 March, which became the law of 22 March 1924. 24 General income tax on securities. Note by Baudoin-Bugnet, for the Minister of Finance, 12 July 1929. SAEF B 0058613.

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situation of those who by civic duty or by necessity do not want to or cannot avoid paying taxes”. The director’s assessment was quite gloomy, since a “very large number of taxpayers evade their tax obligations” while the legislator acquiesced in “the claims of some people to avoid an audit”, which was considered “vexatious”, and granted “more guarantees to taxpayers and fewer means of action to tax agents”. The system had to be reformed. 1.3 Late but Promising Reforms Two reforms adopted in 1934 are noteworthy. The first one reinforced the power of the tax inspectors (law of July 6), who could automatically exact a tax on citizens whose declarations were deemed to be insufficient, based on their “conspicuous and notorious” personal expenses, as well as on their income in kind. The second concerned the abandonment of the optional lump sum and the system of categories in 1934 (decree of 20 July).25 These reforms aimed to create an answer to the budgetary difficulties and to different scandals linked to tax evasion. The decree of 20 July 1934 put an end to the sharp increase in the number of lumpsum taxpayers from 1929 onwards and to the activity of “unscrupulous accountants” who engaged in an “organised sharing of profits resulting from tax evasion” by convincing small traders that “skilfully drawn-up accounts made it possible” to “mitigate their declarations and leave them with a substantial profit after the accountant’s payment”. The flat-rate tax was made compulsory for commercial activities or the letting of accommodation when the annual turnover did not exceed 60,000 francs, and for other taxpayers as soon as the amount of their turnover did not exceed 300,000 francs. The possibility opened up by Article 15 of the Direct Tax Code to request a revision of the flat rate within the first two months of the year increased the flexibility of the procedure. The system was well received. 98% of taxpayers subject to the compulsory flat rate accepted the auditors’ proposals without discussion. Most disputes were settled out of court. The reform should have made it possible to strengthen the auditing of the largest companies’ accounts. The creation of a special auditing 25 Budget. Finance Act (1936–1938). Bill to establish the general budget for the year 1936. Directorate-General of CD. Observations on the amendment to the bill presented by Joseph Denais, proposing a return to the optional flat rate, 14 p. SAEF B 33 993.

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and research service (the law of 28 February 1933), as demanded by the auditors’ union and supported by the Minister of the Budget, the radical Lucien Lamoureux, was very promising. A circular from the CD in August 1933 instructed this service to set up audit teams in the most active departments and to organise inspections of large companies.26 However, it did not receive the staff it had planned for “because of the cuts in personnel” imposed by budgetary decisions. The funds required for its start-up were not released until 1935. The service was then organised by several administrative notes in June 1935. It was planned to entrust the most difficult cases to teams of auditors in the largest departments (Alpes maritimes, Bouches-du-Rhône, Gironde, Rhône, Seine). Despite the inspectors’ inexperience, the first checks carried out in 1936–1937 resulted in “very substantial” corrections.27 Until the outbreak of war, the methods were subject to continuous refinement under the direction of Jacques Chezleprêtre, head of the CD office.28 In 1938, the service had 200 agents divided between an economic and tax documentation service, two national compliance teams, and nineteen departmental compliance teams. Its results were convincing. Between 1934 and 1938, the share of adjustments in total declared profits rose from 17.5% to 28%, which testified to the growing effectiveness of the audits. This increased share was linked to the increase of control of accounting by a new specialised service created in 1934 but credited at the end of 1935. The establishment of the first case studies of occupations based on the information collected was another encouraging sign.29 The experiment was to be extended since the principle of reforming the administration of the CD and strengthening inspections was adopted

26 Service des vérifications de comptabilités. Organisation of the brigades, central personnel office, undated, p. 7, SAEF B 42 115. 27 National Investigations and Audits Directorate. Note from Jean Watteau, Director

General of the CD, on the organisation of documentation, 30 March 1939. SAEF B 643. 28 Idem. National Investigations and Audits Directorate. Economic documentation: verification of accounts. Note relating to the conditions for carrying out account verification programmes for the year 1941. Signed Pierre, Director, 9 March 1942. 29 Idem. Note on the organisation and results of income tax audits, addressed to the Minister, unsigned, 23 December 1938.

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by Parliament when the Finance Act of 31 December 1938, was passed.30 The reform provided for the creation of a single enforcement directorate, the introduction of verification teams in the most industrialised departments and a national compliance team, the increased specialisation of inspectors, and a rise in staff numbers.31 The reform was ready on the eve of the war, and a directorate of economic documentation was set up in the CDs to ensure coordination of the work.32 A service capable of establishing and verifying direct taxes was being defined. The reform of the CD’s administration continued under Vichy. The various departments managed to compile case studies of professions, to maintain certain checks, and to obtain spectacular tax adjustments, but the economic context (a fall in production and the occupation charges paid to Nazi Germany) and political context made this experience largely artificial. Overwhelmed by the inspections, large numbers of taxpayers contested the reassessments of a service undermined by the lack of personnel and the fact of working for a repressive regime.

Between Resistance and Accommodation The Ministry of Finance lacked the means to react to the economic chaos of the liberation and consequently, “taxpayers declare[d] the profit they want to declare”.33 Tax evasion appeared as a necessary corrective to the monetary depreciation that emptied some businesses “of their substance”, while others were built up through exaggerated sales prices and “impudent tax evasion”. Until 1949, i.e. until the end of the restrictions, the tax authorities were content to carry out as many checks as possible to “rough up” the situation without imposing too many penalties. 30 Reform of the central controls of the Directorate General of the CD (1937–1947). Report on the first year of the administrative reorganisation and the creation of central controls, December 1940. SAEF B 42 116. 31 Reorganisation of the administration of the CD (1937–1940). Directorate General of the CD. The general economy of the reform. Unsigned note, but probably from Chezleprêtre, the instigator of the reform. SAEF B 42 114. 32 Tax inspection (1946–1952). Statistical information. Note for the Minister of the Economy on the Economic Documentation Directorate, Chezleprêtre, 8 June 1943. SAEF B 641. 33 Unsigned, Dix ans de contrôle fiscal en France. Le problème de la fraude fiscale dans les diverses étapes du redressement économique de 1945 à 1955, Ministry of Finances, 1955, Imprimerie nationale, 46 p. SAEF Library.

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The extent of the level of fraud was confirmed at every audit. Busy with price controls and investigations of illegal profits, the tax authorities were unable to fight. The reform of April 1948 marked a change. It established a single check-in 42 of France’s departments, instituted functional flexibility in the department of the Seine, and established the verification teams, composed of agents from the CD and the Registration Department, on a nationwide basis.34 The increase in the number of inspection staff was significant. The number of agents with expertise in accountancy audits increased from 850 in 1937–1938 (200 for the CD and 650 for the Indirect Taxation department) to 1817 (409 for the CD and 1468 for Indirect Taxation), to which were added 670 agents from the Contrôle économique, who were assigned to the three Régies in 1949. The results were not commensurate with this increase, though, as we will explain later. The Tax Problem From 1950 onwards, there was widespread agreement that the situation had to change. Many members of parliament had demanded that the fight against tax evasion be strengthened, so a new commission was set up.35 This fight seemed to be all the more difficult, as the attempts at evasion came mainly from small businesses or individuals whose accounts were impossible to verify. Thus, corporate tax evasion was less frequent than personal income tax evasion. In 1952, the statistical office of the Ministry of Finance estimated that fraudulent duties represented 42.5% of the duties due for retail sales by non-producers, compared to only 7.9% for other sales.36 It pointed out that verification capacities were insufficient. With 25,000 audits per year for about 450,000 companies and businesses, only one in six taxpayers could be audited within the statute of limitations, which meant “everyone has a chance every 25 years”. Several studies showed that the tax problem was not only a refusal to pay tax but also its 34 Contrôle fiscal, renseignements statistiques (1946–1954). DGI, note on statistical

documentation, 20 April 1949. SAEF B 641. 35 Tax inspection (1953–1960). Miscellaneous. The creation of the commission is included in the Finance Act of 31 January 1950. This commission did not produce any reports. SAEF B 637. 36 SAEF B 28 371. Tax reform commission 1952. Notes concerning turnover taxes, Jean Ribière, rapporteur.

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misallocation. Measures favourable to small producers led to a proliferation of commercial enterprises that could survive only by increasing their profit margins and evading taxes. Their concealment forced the government to recover the tax shortfall from “honest taxpayers”.37 In 1952, the national union of CD executives condemned the iniquity of a system that allowed traders, industrialists, and liberal professions “to conceal from the tax authorities a third, half - or more - of their turnover or income” and to tax “only the schoolteacher” in “many villages with farms of 50 and 100 hectares”. The union concluded that “there are still taxes, but there is no longer a tax system”. For its part, the Inspectorate of Finances attributed the “irrepressible development of tax evasion” to the declarative principle that, in the absence of “serious compliance checks, honesty quickly proved to be completely utopian”.38 These dysfunctions were cumulative: “For 25 years, the State has compensated for tax evasion” by increasing the tax burden and threatening “sanctions” so severe that “their scope is illusory”, which “stimulates fraud that takes cover behind the growing complexity of tax legislation”. These observations called for reforms. Time for Reforms and Compliance Teams In his inaugural declaration on 7 March 1952, Antoine Pinay, the new President of the Council of Ministers, announced a tax amnesty, a reform of the tax system, and the resumption of inspections and compliance checks.39 He entrusted a committee of experts with the task of completely rethinking the tax problem and proposing an objective and lasting solution. The committee presented its report in July 1952.40 A new committee succeeded it and called for “a convergent effort to renew the legislation”, to repress tax evasion, “to reorganise administration” and

37 Unsigned, Dix ans de contrôle fiscal …, op. cit. 38 Tax reform (1951–1954). Minutes of the meetings of the Loriot Commission.

Reform project presented by the General Inspectorate of Finance on 5 May 1952. SAEF B 28 388. 39 Assemblée nationale, declaration of investiture of Antoine Pinay, 7 March 1952, JO,

p. 1. 40 Tax reform (1951–1954). General report of the Loriot commission, 12 July 1952, p. 63. SAEF B 28 388.

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pointed out that the real solution for tax evasion “lies in a change of mind-set towards taxation”.41 After the tax amnesty, according to a Ministry of Finance brochure published in 1955, actions against tax evasion were strengthened.42 They were facilitated by improved collaboration between the tax authorities and by the inspectors’ functional flexibility. Thus, between July 1953 and July 1954, agents from outside the CD were involved in 22% of the audits of income tax returns and brought in nearly six billion francs in duties and penalties out of the 26 billion collected (i.e. 24.5%). Also, according to this brochure, the efficiency of compliance checks could be increased by “better coordination of the tasks of the three Régies ”. The experience of the multipurpose teams was effective. Instituted at the national or departmental level, they had been specialists in cross-checking and stock control in Paris since 1949, in the inspection of certain professions in the Seine department since 1950 and of certain categories since 1952, in identifying signs of expenditure (Paris in 1952 and Antibes 1953) and auditing of the accounts of very large companies.43 Between 1951 and 1954, the Seine compliance teams visited 11,000 tradesmen (tailors, chemists, and perfumeries) and found irregularities in 19% of them (2127). Across the whole of France between the same dates, they checked 17,975 shops, 42% of which (7510) were in an irregular situation. An operation to control producers of margarine in the Seine was organised in 1953–1954. The psychological impact of these operations was not negligible. They accentuated the feeling of being under surveillance and dissuaded fraudsters. The programme was established at a meeting of the directors of the departments of Direct and Indirect Taxation and the operations were organised by a central department, the tax study and inspection service set up within the General Tax Directorate (DGI) in 1952. The national police could also be asked to participate in the operations. Thus during the

41 Tax reform 1952. Report of the Abelin Committee, p. 48. SAEF B 28 372. 42 Unsigned, Dix ans de contrôle fiscal en France…, op. cit. 43 Thematic reports of the Inspectorates of Finance control brigades, 1957. Note on the

revenue control brigade headed by Chief Inspector Macart, signed Thomas, 9 February 1957. The brigade was created on 1 June 1952, to verify the tax situation of: foreigners residing or domiciled in France; persons whose lifestyle or conspicuous and notorious expenses were not related to their declared income; taxpayers who had refrained from filing a return and whose income was not known. SAEF 4A-0002325/1.

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checks on “practitioners of methods not accepted by official medicine” by the Paris compliance team, the Prefecture of Police gave the DGI a list of 3000 American car owners domiciled in Paris in 1948, but this information did not lead to any practical results. In contrast, improvements in the auditors’ techniques and checks on a sample of the audit reports made the compliance checks more effective. The harmonisation of penalties and their subsequent tightening after the amnesty reinforced the fairness of the system. The financial and tax departments considered the work of the compliance teams to be “crucial to the survival of income tax”. In 1955 the Ministry of Finance estimated that compliance checks on tax returns brought in 180 billion francs in revenue.44 These results have of course to be put into context: tax evasion persisted and enjoyed “rather favourable prejudice” in public opinion. Tax Intolerance Strict enforcement gave rise to unexpected and lasting resistance. Tax compliance was compromised in some regions, but no legislative proposal to improve the tax system was ever adopted. The director of the DGI, Robert Blot, indicated that “the Poujade movement” slowed compliance checks down. While 160,000 audits were carried out in 1953, only 60,000 were carried out in 1955, and the tax study and inspection department estimated that there would be just 40,000 in 1956.45 The difficulties encountered in the establishment and execution of audit programmes persisted into 1957.46 However, “the yield of tax auditing in terms of simple duties resulting from accounting audits continued to increase”, rising from 35 billion francs in 1953 to more than 51 billion in 1956, which showed that the effectiveness of auditing was also due to “the fear that it may inspire”. “The transfer of the services’ activity towards the biggest taxpayers” explains this increase. It led to the organisation of “several spectacular compliance operations” in the Marais 44 Tax reforms (1954–1955). Projects. SAEF B 58 846. 45 Tax studies and control service. Tax auditing (1954–1958). Note by Blot for the

Minister on the situation and prospects of tax auditing, 30 November 1956. SAEF B 58 847. 46 DGI. Tax control (1953–1960). CD. Audits of accounts, General Administration Department. Report on the difficulties encountered in the establishment and execution of audit programmes in 1957, signed by Pradel, 10 March 1958. SAEF B 637.

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district of Paris in January 1957, following the operations of 1954 against “the shoemakers of Belleville” and those of 1955 against “the textile merchants of the rue Sedaine”.47 From 1958 onwards, several directives from the DGI stipulated that compliance checks should be reinforced and their techniques improved.48 The results of all audits were centralised in a single file after 1959 and report writing was standardised. In 1960, Blot called for a complete rethink of the organisation of tax audits and for a focus on the audits of accounts, which were already the “centrepiece” of the agents’ work and their “essential task”.49 Even though they were tedious, these audits brought in much more than they cost, since in 1959, for example, the total amount of simple duties and penalties recovered from the 58,168 companies inspected reached 94 billion old francs, which was much higher than the “funds allocated to the functioning of the entire DGI”. Blot reminds us that on 1 January 1960, 428,000 companies were taxed on actual profits and about 1.4 million on actual turnover. The shortage of auditors was glaring. There were 768 auditors in the CD, 1146 in the Indirect Taxation Department, and 418 in the Registration Department, giving a theoretical total of 2332. Vacancies brought this number down to 1700 “poorly paid” agents, who carried out a “thankless and unpopular mission […] complicated by difficult legislation”. The DGI sought to use other services to circumvent this obstacle. Special groups were set up in conjunction with the Sûreté Nationale between the end of 1959 and the beginning of 1960 in Lille, Lyon, and Marseille. They intervened to investigate suspicious companies and seized hidden accounts. Their results were “eloquent” but they could only intervene in cases of “serious tax evasion and for which prior information was available”. Blot called for a serious reinforcement of the compliance staff, particularly when the packages that kept the agents busy were renewed. The agents’ productivity increased after this: despite the continuous decrease in the number of auditors and the number of audits, the number of duties

47 DGI. Tax inspection (1953–1960). Note by Blot on the activity of tax inspection in 1960, 26 September 1960. SAEF B 637. 48 DGI. The organisation of work, directives (1958–1967). SAEF B 53 986. 49 DGI. Tax inspection (1953–1960). Note by Blot for the head of the general

administration, 15 April1960, 4 p. SAEF B 637.

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reclaimed, and penalties increased constantly between 1962 and 1967.50 Regional disparities were very pronounced and the inspection schedules remained erratic, which was not favourable to tax equity. Thus, the system was still based on recognised tax evasion.51 Any reform had therefore to take into account the fact that “tax morality in France” was less developed than it was “on average in other countries”. In these conditions, the way to overcome fraud was not so much to reduce the tax pressures or to change techniques, as to resolve a problem of morality that could be brought under control only “when it will no longer be accepted that defrauding the State is not stealing”. These statements by an Inspector General of Finance point to both the limits of any reform of the system and the widespread acceptance of the inevitability of tax evasion.

Conclusion---Fighting Tax Evasion: Is It an Impossibility? Two world wars and two periods of reconstruction forced the State to take stock. However, the reforms that seemed necessary to those involved in tax collection had not been undertaken. How can we interpret this stalemate? Is it a sign of collusion of interests? If the fight against the deliberate concealment of income from the tax authorities was more often led by the left, the debates and the reforms introduced first by the National Bloc and then by Antoine Pinay showed that it was supported by a wider spectrum of politicians. Those who wanted to hear them were familiar with the analyses and recommendations made by those involved in tax compliance, the director-general of the tax authorities and the DGI, as well as the unions of the CD. Auriol listened to the CD union, and the Minister of Finance of the Popular Front did not initiate any profound reforms, although they were included

50 The organisation of work directives (1958–1967). Note for the Director-General of the Directorate General of Taxes, Sub-Directorate II D. Subject: Audits of accounts. Analysis of the results for 1967 and prospects for 1968. Measures to be taken, signed by the head of department Bertaux and drafted by Tixier, 8 November 1968. SAEF B 53 986. 51 Reports of the Inspection de Finances. 1959. Tax reform. Report by Inspector General Auboyneau on reform of personal income tax, 13 March 1959. SAEF 4A0002365.

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in the Front’s programme. At the beginning of the Fifth Republic, the Finance Minister Valéry Giscard d’Estaing, having himself passed through the Finance Inspectorate, did not release the funds requested by the DGI to recruit personnel. On the other hand, he had the accounting obligation adopted in 1965, a “free” measure recommended by Blot to improve checks on actual profits. Thus, the budgetary imperative did indeed mark a break with past practice, even if the inspections very quickly yielded more than they cost. Paradoxically, the tax administration’s view of the history of the fight against tax evasion in contemporary France shows its political staff to have been ineffectual. This history is one of slow acculturation (Delalande 2011) of a learning process undertaken by some officials receptive to optimisation. It is also a story of permanent infighting between tax authorities that prevented the effective coordination of investigations, the crossreferencing of information, and the organisation of an effective fight. It is also partly the story of the failure to establish tax equity, which is, nevertheless, an important factor in engendering public consent to taxation. The persistence of the dualism between the “fiscally weak”, small flatrate companies unable to pay the staff necessary to keep their accounts, and subject to the arbitrariness of the auditors, and the “fiscally strong”, able to master the accounting rules or to call on the services of professionals to compile their declarations,52 and, more recently, the differential treatment of tax reassessments (Spire 2009), do not bode well for French democracy.

Bibliography Delalande, Nicolas. 2011. Les Batailles de l’impôt. Consentement et résistances de 1789 à nos jours. Paris: Seuil. Farquet, Christophe. 2012. Le marché de l’évasion fiscale dans l’entre-deux guerres. Alternatives économiques 2012/2 (54): 95–112. https://doi.org/ 10.3917/leco.054.0095.

52 Tax reforms (1952–1958). Suggestions, proposals, studies. National Assembly, annexe to the minutes of proceedings of the sitting of 27 March 1953, discussion of government bill no. 5798 of 6 March 1953 and bill no. 6057 tending to simplify taxation and correct its injustice, tabled by Francis Leenhardt and members of the Socialist group. SAEF B 58 840.

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Guex, S. 2007. 1932: l’affaire des fraudes fiscales et le gouvernement Herriot. L’économie Politique 1 (1): 89–104. https://doi.org/10.3917/leco.033. 0089. Neurisse, André. 1996. Histoire de la fiscalité en France. Paris: Economica. Nizet, Jean-Yves. 1991. Fiscalité, économie et politique, l’impôt en France 1945– 1990. Paris: LGDJ. Spire, Alexis. 2009. L’inégalité devant l’impôt. Différences sociales et ordre fiscal dans la France des Trente Glorieuses. Revue d’histoire moderne & contemporaine 2009/2 (56-2): 164–187. https://doi.org/10.3917/rhmc. 562.0164. Tristram, Fréderic. 2005. Une fiscalité pour la croissance. La direction générale des Impôts et la politique fiscale en France de 1948 à la fin des années 1960. Paris: CHEFF.

CHAPTER 16

Detecting Ordinary Tax Evaders: The Example of the 1945 National Solidarity Tax in France Isabelle Rabault-Mazières

In many European countries after the First and Second World Wars, economic and financial imperatives forced governments to introduce exceptional taxes on wealth. No such tax had been adopted in France in the aftermath of the First World War, but the Minister of Finance, René Pleven, introduced a capital levy in 1945. The National Solidarity Tax—the impôt de solidarité nationale (ISN)—was established by the Ordinance of 15 August 1945 and consisted of a tax on assets held by individuals on 4 June 1945, but also of a levy on wealth acquired between 1940 and 1945.1 More than two million tax declarations were filed,2 1 There was also a proportional levy on companies and legal persons, which is not included in this study. 2 About 15% of tax households.

I. Rabault-Mazières (B) Université Paris 1 Panthéon-Sorbonne, Paris, France e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature 337 Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_16

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processed and thoroughly controlled by one of the tax administrations, the Administration de l’Enregistrement.3 This levy on individuals, which brought in nearly 103 billion francs from 1946 to 1949,4 seems to have been subject to numerous infringements and irregularities, as evidenced by the extent of the checks, adjustments and fines. The overall statistics tell us little, however, about the actual nature of tax offences and the identity of tax evaders. Recoveries depended on the investigation of controllers, who, in a sense, ‘produced’ tax evasion by detecting it. How did they identify violations? What were the methods and effectiveness of the controls? What do we know about the accuracy of their checks? The auditors, who scrutinised taxpayers’ files and had real interactions with them, are a blind spot when considering tax evasion through the lens of statistics. Oppositely, what do we really know about tax evaders? Most often, tax evasion was embodied by public figures or illustrated by spectacular cases that were not necessarily representative of ordinary tax evaders (Guex 2007, 89–104). To find them and to understand how the auditors worked, we needed to delve into tax files.5 Fortunately for historians, a good number of private individuals’ ISN files have been deposited in the Departmental Archives. 213,000 files of Parisians have been kept in the Archives of Paris. This opportunity has enabled us to examine the issue of control and tax evasion in the field. The aim of this article is to compare the aggregate data with the findings from the wealth tax returns of ordinary Parisians. After briefly explaining the characteristics of the ISN, we will examine the action programme implemented to limit tax evasion. We will then focus on how the Parisian tax declarations complement the statistics. This 3 Before it was abolished in 1969, the Administration de l’Enregistrement, des Domaines et du Timbre was responsible for transfer duties, and in particular inheritance tax, which became progressive in 1901. Hereafter, we will refer to it as the Enregistrement, as contemporaries did. 4 The total amount of ISN collected in 1957, including the levy on companies, was about 130 billion francs. In 1946, 51 billion francs were collected, i.e. 14% of State tax revenues, and 39 billion in 1947 (7%). See: Annuaire (1949) and Statistiques (1952, 16). 5 Bouloc (2018) analyses the work of the auditors and their interactions with the taxpayers after World War I through the files. His study shows the richness of a groundlevel approach. Another example is the analysis of the confiscation of illicit profits (Bergère 2008).

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micro-historical approach makes it possible to examine the interactions between controllers and taxpayers, highlights the nature of offences, and sheds light on ordinary tax evasion in France in 1945.

A Reparation Tax Threatened by Evasion ISN was both a capital levy and an increment levy (Rabault-Mazières 2020). The first tax applied on property owned on 4 June 1945, above a threshold of 200,000 francs for a single person without children (400,000 for a married couple). Taxpayers whose assets exceeded this threshold had to file a declaration making a detailed inventory of their belongings, as for an estate. After some deductions, including family allowances, if appropriate, the worth was taxed according to a progressive scale ranging from 3 to 20%. The second tax dealt with what was defined as ‘enrichment’. All assets that entered the taxpayer’s patrimony for valuable consideration between 1 January 1940 and 4 June 1945 could be taxed. In the declaration form, it was necessary to distinguish, among goods possessed in 1945, those already owned in 1940, which were excluded from the calculation of the increment, and the ‘new’ assets acquired between 1940 and 1945. After deducting liabilities, half of the income, and various lump sums, ‘enrichment’ above 50,000 net francs (or 100,000 francs for a married couple) was taxed at sharply progressive rates, reaching 100% above five million francs of increase. Finally, in June 1947, a 25% surcharge was applied to the total amount of taxes.

Fighting Tax Evasion: A Political, Financial and Moral Imperative From the outset, the issue of tax evasion went hand in hand with the thinking and design of this levy. The aim was to limit the possibilities of evasion, both upstream and downstream. The fight against tax evasion was a financial imperative but also a moral one: the ISN was supposed to redress the inequalities caused by the war by equalizing the material sacrifices between citizens. This was not the only issue. The preparatory documents show that the ISN was also initially envisaged as a way of combating tax evasion since it was thought that it could help to achieve a wealth register. If the

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tax administration had full knowledge of their assets, it would be much more difficult for taxpayers to claim to have low incomes. The ambition was to overcome widespread tax evasion. For instance, income tax was described in the interwar period as ‘l’impôt des poires ’ (‘the sucker tax’), because apart from employees, only willing or naive taxpayers would pay the tax. There were two main kinds of tax evasion: many self-employed taxpayers did not declare all their professional income, and many securities, in particular securities held abroad, escaped inheritance and income taxes.6 All the experts considered that evasion was very easy, and they estimated that almost half of the income from securities avoided taxation (Hautcoeur and Sicsic 1999, 39–40). In the 1920s and 1930s, capital flight, particularly to Switzerland, had been considerable, fuelled by increases in the marginal rates of general income and inheritance taxes, by threats of capital taxes, and by recurrent episodes of currency crises (for an international overview, see Farquet [2012]). In 1945, the French capital in Switzerland represented six to eight billion Swiss francs, i.e. between 69 and 92 billion French francs, or 65–87% of the amount of the Marshall Plan to be received by France. Additionally, the flight of capital continued after the war, amounting to an estimated 700 million Swiss francs per year (Schaufelbuehl 2009, 55–56, 229–230). There was a real paradox in creating a rather complex tax that the auditors discovered at the same time as the taxpayers, while the fiscal administration was, in everyone’s opinion, powerless to crack down on tax evasion.7 According to some observers, ‘reactions of taxpayers in the direction of tax evasion were particularly strong’ (Guérin 1949, 191): even before the ordinance was passed, it was about hiding or duplicitously getting rid of assets that could be traced back. Given the financial and moral stakes, the Government thus had to prove its determination by implementing a road map to thwart these dishonest strategies and enable the subsequent discovery of tax evaders.

6 On tax evasion before 1945 (Delalande 2011, Chapter 12; Tristram 1997; Spire and Weidenfeld 2015, Chapter 1) see also Béatrice Touchelay’s contribution in this book. 7 This argument had served the detractors of the tax. In their eyes, far from being a tool for fiscal justice, the ISN would aggravate the inequalities: the extent of the tax evasion would penalise honest taxpayers.

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A Campaign Plan to Fight Tax Evasion Upstream The declarative procedure implied that strategies had to be devised to limit the possibilities of concealing goods and to facilitate the discovery of offences. It was crucial to personalise previously anonymous assets, and to collect and centralise the available financial information on citizens, both within and outside the country. From the beginning of 1945, the government issued orders aimed at establishing an inventory of highly mobile or anonymous assets and identifying their owners. The order of 16 January prescribed the census of all assets existing abroad on 31 December 1944 whose worth exceeded a total value of 20,000 francs. Those who did not comply risked heavy penalties. This was not a new obligation. A similar declaration had already been imposed in September 1939 but was never really implemented: in 1939, legalised assets represented only 2% of French funds in Switzerland (Schaufelbuehl 2009, 88). A 20% ‘legitimation tax’ was introduced in 1945 to enable citizens to comply with the law. The conditions were more favourable to the government’s project than in 1939. The Minister hoped that the release of assets that had been frozen abroad since the beginning of the war could be done by lifting the anonymity of their holders. Financial cooperation with the British, Belgian, Luxembourg and Monegasque governments had been settled, René Pleven had declared in March, who thus expected one billion francs to be received from the ‘legitimation tax’. By July 1945, he had obtained 65,000 declarations of assets, compared with only 35,000 in 1939 (Journal officiel de la République française. Débats… 26 July 1945, 1485). He did not specify the amount recovered, probably because the sums were small in comparison to the capital held abroad. In addition to the census of French assets outside the country,8 the most important operation was the exchange of banknotes and the stamping of short-term public bills, which had been anonymous and taxexempt until then.9 Carried out from 4 to 15 June, this operation only involved high-denomination banknotes exchanged for francs of the same

8 On the 17th of January, the census of gold, foreign currency, and foreign securities kept in France was also ordered. 9 From 1941 onwards, bearer shares had to be deposited in the ‘Caisse centrale de virements des titres’.

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value.10 Cash, particularly black-market cash, which was not deposited in a bank where it would be registered, had to be exchanged—and therefore recorded—so as not to be worthless. At the same time, the stamping of short-term government securities removed their anonymity. Thus, it was no longer possible to keep cash in cookie jars or under mattresses without the tax services knowing and potentially taxing it. The operation had been prepared as secretly as possible, but the secret had not been completely kept, and anyone who wanted to conceal large gains and cash tried to hide their wealth, as it was common knowledge that the transaction was to precede a capital levy. The techniques of fraud were numerous, as the Minister himself acknowledged, warning potential tax evaders that their tactics were anticipated and would be foiled. For example, fake identity and food cards could be used to open a bank account under a false name, deposit a large amount of cash before the banknote exchange period and withdraw it after the closing of the period, and thus be untraceable in the future. In Les Halles, where the black market in food had flourished during the Occupation and was still doing so, a false identity card was traded for around 100,000 francs, which was the (future) tax threshold for a married couple to be taxed on the increment.11 To thwart these attempts, which could have a serious impact on the ISN’s performance, very strict instructions were given to financial institutions and Exchange offices.12 Alternatively, one could distribute one’s cash in the hands of accommodating and less fortunate people who therefore would not be taxed. They would be responsible for exchanging the cash under their own name and 10 Small-denomination notes, which were not affected, accounted for only 1.8% of the total currency in circulation. 11 Note du receveur municipal de Villejuif , 22 May 1945, in File Litigation cases conducted by the Special Tax Evasion Control Unit, Centre des archives économiques et financières (CAEF), Savigny-le-Temple, B 0050272. 12 Instruction 45.1177 of 5 June 1945 required stockbrokers, securities brokers, banks and financial institutions to register, after checking, the names and addresses of the persons for whom they sold or had sold securities. The Minister’s office, alerted to the lack of identity checks by financial institutions opening accounts before the start of the banknote exchange period, asked them to strengthen controls on withdrawals. This would make it possible to control purchases of public annuities just before the exchange of notes, which, having not given rise to any income and therefore being recorded on the coupon slips, could have escaped taxation. According to the economist René Courtin, this was a ‘huge hole left in the net, through which many fish, big and small, could pass’ (‘Une lacune de l’impôt de péréquation nationale’, Le Monde, 2 July 1945) .

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would afterwards hand over the new notes to their owners for a small fee. To counteract these tactics during the exchange period, large or disproportionate amounts in light of the profession of the depositor led to the opening of an investigation. The Central Tax Evasion Control Department was particularly attentive to the situation in Paris. Deposits over 100,000 francs were systematically reported to the Special Tax Evasion Control Service, which enabled large-scale frauds to be thwarted. Many more discreet attempts, however, certainly went unnoticed. In order to check the sincerity of files, the information on the assets of individuals, which had previously been scattered, was centralised. Public administrations were concerned with the transmission of information, as were all institutions holding assets: banks, insurance companies, stockbrokers, etc. They were required to identify all assets and to provide a list of holders of credit accounts of more than 20,000 francs as of 4 June 1945. All transactions exceeding 20,000 francs on unusual accounts during the month of June were to be reported, as well as credit accounts exceeding 100,000 francs on 1 October 1945. The aim was to discover sums that had been provisionally remitted to non-taxable persons before 4 June and recovered after that date by their owners.13 The insurance companies had to communicate the names of their main policyholders. To avoid opportunistic cancellations by wealthy taxpayers anxious to conceal their valuable assets, such as jewellery, they also had to report insurance policies cancelled after 31 December 1944. These cancellations would, by default, be considered ‘suspicious’ and considered null and void unless justified. Without going into detail, a massive administrative organisation was set up to process the banknote exchange and the 2.4 million declarations throughout the country. 35,000 counters were opened, to which 100,000 employees were assigned, and 1000 auxiliaries were specifically recruited for the operation. A precise protocol was developed to process all these information bulletins, to liquidate the tax, and to control all the declarations in the most efficient way. In a difficult context, this organisation made it possible to uncover a large number of offences and to recover significant sums due to the Treasury.

13 Instruction 45.2515 of 25 October 1945 on tax adjustments.

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Massive Evasion and Avoidance? The Statistics in Relation to the Files For tax based on a personal declaration, the offence could consist of either not filing a return or making an inaccurate report by establishing an incomplete inventory, underestimating the assets, inflating liabilities and, in the case of the increment levy, declaring assets acquired during the war as old assets. The official statistics attest to the extent of the adjustments. Every office had to keep a ‘discovery register’, in other words, a register in which irregularities and infringements discovered during the audit operations were recorded. Each offence (under-valuation of real estate, business assets, omission, classification of new property as old property, a declaration received after a request from the Enregistrement ) was the subject of an article. It was from these different registers that the inspection statistics were drawn up. As of 1 January 1949, 1,167,835 violations had been identified: that is, nearly half the number of returns filed. The number is high, but the number of taxpayers corrected was smaller. Since each infraction was counted separately, some files had more than one adjustment. At this point of our research, our Parisian sample allows us to estimate the proportion of taxpayers corrected as one-third of the total. According to the Ministry of Finance, the sums recovered through auditing greatly improved ISN revenue. The investigations would have provided 23.4% of the revenue from individuals (Bulletin 1949, 90). This very high ratio overestimates the importance of the controls. In fact, these statistics include the recovery of declarations filed late but spontaneously, the regulatory deadline being 15 April 1946. 221,500 returns were in this category, i.e. 9.3% of the files (Statistiques 1949/4, 735). Of course, filing a return after the deadline was an offence punishable by penalties, but some delays were legitimate and accepted by the inspectors. Furthermore, these returns were not the result of an investigation that led to an official request to file. By eliminating them from the calculation, the results are less spectacular. Thus, for the period 1946–1948, the total amount of recovery resulting from effective control reached 11.694 billion francs, or 11.5% of the sums paid by individuals, far from the 23% mentioned (Bulletin 1949, 90). As the adjustments continued in 1949, their final importance in the recovery is certainly higher, but the data do not allow us to specify to what extent.

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How much potentially taxable wealth and increment escaped taxation? No estimate was provided at the time, as the Director of the Enregistrement preferred to emphasise the effectiveness of control. For those whose assets were just over the threshold, however, it was tempting to refrain from filing, especially if they had not deposited large sums in the exchange transactions. At worst, they risked late penalties that could be greatly reduced if their good faith was recognised, which was often the case. According to a collector who had been appointed in the Marne district in 1945, and mentioned the ISN years later, the risk of being discovered was low: only the unfortunate declarants were really controlled, because to my slim knowledge of two departments, the non-declarants, in spite of the great proclamations, were almost never worried, in spite of the tons of crosschecking slips coming, for example, from this exchange of the currency. (Mémoires 2004, 734)

We cannot generalise this observation, which perhaps holds only for the Marne and some rural departments. In Paris, the archives kept track of numerous investigations launched from information provided by the bulletins: registration certificates, bank accounts, Exchange office statements, etc. The work of the inspectors was thorough when there was a strong presumption of a large fortune. This cross-checking examination made it possible to obtain additional declarations. By June 1949, 216,000 returns, or 9% of the total, had been deposited after a claim by the tax administration (Bulletin 1949, 90). The cross-checking work seems to have been highly profitable, since these declarations had brought to light 46% of the total amount of assets discovered. Yet only 18% of the sums resulting from the audit came from these declarations. This is only an apparent contradiction: the ‘discovered’ amounts included the entire net assets, but given the individual and family deductions, they were not taxed in full. On an average of 641,740 francs of assets per declaration, the taxable wealth could be 150,000 francs, and the tax, at a rate of 3%, 4500 francs. From the published data, we cannot estimate the proportion of the total number of taxpayers who were reminded of their obligations out of all defaulters, as well as the potential amount concealed. However, the number of returns received, higher than the Enregistrement ’s initial estimate, suggests that most wealthy taxpayers convinced that they could not

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go unnoticed, complied with their obligations. More precisely, families whose wealth was well above the tax threshold filed their declarations, but they only mentioned the assets they could not conceal, such as business assets or buildings, Treasury bonds, or cash in the bank. Most of their assets held abroad were kept secret, however. The census of foreign assets had limited success and did not uncover the bulk of the omissions, especially concerning Switzerland. Despite its efforts, the government did not get the Swiss banks to lift their banking secrecy practices for the French accounts that they managed in Switzerland or abroad. Thus, a significant part of the French movable assets deposited in Swiss banks was transferred by the latter to the United States during the war. A very high proportion, around 80% of this wealth, was able to be recovered after the war by its owners—most of whom belonged to the wealthiest social strata—by evading the French tax authorities (Schaufelbuehl 2009, 229– 290). There is therefore no doubt that the loss of revenue suffered by the ISN administrators due to the flight of French capital abroad reached an amount of several billion francs, most likely over five billion.14

A Systematic and Methodical Control of the Files Prior to cross-checking information from different sources in the hope of finding defaulters, it was more cost-effective to check the two million files for errors and inaccuracies. These systematic and methodical checks yielded the greatest returns. The Parisian files confirm that the strict protocol defined by the director of the Enregistrement was seriously applied. The employees assigned to ISN had to follow a precisely codified procedure intended to systematise and streamline audits. Thus, the returns were first liquidated on the basis of the taxpayer’s statements, so that the sums could be collected quickly. The in-depth control took place mainly in 1947 and 1948. Substantial figures had to be verified by the relevant services: the value of business assets or real estate, the amount of cash exchanged and the stamping of short-term bonds, the amount of bank accounts, insurance policies, the value of vehicles, valuation of securities and social rights, income declared to the income revenue service,

14 It should be noted that assets with a material basis abroad (real estate, business assets) were not subject to ISN.

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debts and receivables, etc. This in-depth examination often resulted in several liquidations when further infringements were discovered. The control of the Parisian files, particularly the patrimonies clearly exceeding the threshold, was meticulous. The declarations were carefully annotated, each line was marked with a ‘C’ (conform), the reference number or the amount of the deficiency. The files contained numerous information slips from taxes services, the Exchange Office, banks, insurance companies, etc. The transmission of information to the offices in charge of ISN seems to have been effective. A control sheet listed all the errors or infringements found, with a list of justifications and explanations to be requested from the taxpayer, who was often invited to come to the controller’s office. Following the appointment, the auditor would draw up a report and propose an adjustment if appropriate. It was then up to his superior, and in the most important cases the departmental director, to take the final decision. In the 2nd and 5th arrondissements of Paris, a third of the returns were corrected, which shows the effectiveness of the control, as the taxpayers’ files were indeed screened by the controllers. On a national scale, the most numerous adjustments concerned the valuation of buildings and businesses: they accounted for 53% of all adjustments (62% in value). Omissions, on the other hand, accounted for nearly 30% of the offences detected, often involving small sums (Bulletin 1949, 19). In the 2nd and 5th arrondissements, 52% of the files corrected were for real estate deficiencies, and as regards the deficiencies of business assets, this concerned 2/3 of the files. While it is undeniable that a good number of Parisian owners tried to minimise the value of their real estate or their businesses, evaluating these assets when prices had quadrupled during the war was not so easy: the auditors often agreed to reduce the penalties if they were convinced of the good faith of the taxpayer. In terms of activity sectors, foodstuffs accounted for 12% of the adjustments, to which could be added 9% for restaurants, and in the clothing, leather, and luxury goods sectors, 20% of the adjustments. Shopkeepers were most affected by corrections.15 Half of the shopkeepers who filed a case were adjusted: while they represented only a quarter of the tax filers in these two districts, they accounted for more than a third of those adjusted. The same applies to managers, sales representatives, or traders, who were also over-represented. These categories together made up 49%

15 We also include in this group the bosses of the restaurant and hotel industry.

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of those who were adjusted, compared with only 33% of tax filers. All the adjusted persons had their assets revalued, but the increases in wealth did not concern all categories. Small business owners, shopkeepers, traders, managers and directors of companies thus experienced a revaluation of their increment, either because the businesses had been acquired during the war or because they had tried to conceal significant income. Other surveys in less commercial districts would make it possible to confirm or invalidate these initial conclusions as to the profile of the tax evaders. The controls led to an increase in the taxed assets, especially in the enrichment. In these two arrondissements, the revaluation represented, on average, 19% of the net value of the assets, but 54% of the increment. The much heavier taxation of gains encouraged not only the undervaluation of assets acquired during the period but also attempts to pass off new assets as old. The control work took on another dimension then. It was not only a matter of comparing the value declared with that provided by the relevant departments—the inspectors had to verify the taxpayer’s assertions using all the evidence at their disposal.

From Arbitration to Arbitrariness? The Controller’s Personal Interpretation An important part of the tax evasion attempts concerned asset growth, which was taxed much more heavily. Many taxpayers tried to minimise it. They declared, without justification, ancient sales, or they classified new assets among old assets, explaining that they came from very old cash, kept at home, for which there was no proof. They said that papers had disappeared due to particular events (bombings, spoliation, etc.), or that transactions had been made without an official deed, so as not to leave a potentially dangerous trace. The files show the importance of recovery through the reclassification of old properties into new ones. The most numerous cases concerned French Treasury bonds. The bonds stamped in June 1945 were automatically classified as new assets unless the taxpayer could prove that he or she owned them (in whole or in part) in 1940. Yet, until 1945, they were anonymous, tax-free and nothing in the legislation required these bond owners to keep track of the bonds that were subscribed and resold. That

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often raised many difficulties.16 Cécile Audille, a 65-year-old pensioner from the 16th arrondissement, had to prove that she owned 360,000 francs in Treasury bills before the war. She wrote: What tangible proof do you want me to give you of an anonymous thing issued like a simple banknote, without any receipt and without any formality?17

When the sums declared were significant, taxpayers were systematically summoned and asked to provide supporting documents proving the accuracy of their claims. All kinds of evidence could be accepted: handwritten notes in a notebook, certificates of subscriptions, etc., but the official instructions encouraged the inspectors to be suspicious: The situation of taxpayers who owned Treasury bills in 1945 will be examined with understanding but, given the considerable increase in the volume of bills in circulation between 1940 and 1945, it is not possible to admit that between these dates there was no change in the size of the bills held or in the persons of the holders. (Instructions générales et circulaires 1946, 59)

They had to answer a detailed questionnaire: where did the funds that had allowed the purchase of bills come from before 1940, where had the bills been subscribed and where were they kept and did they have any record? They often had to tell the story of their lives, multiplying the clues to prove their good faith. Auditors were to assess their attitude, explanations and sincerity. They judged the plausibility of the assertions, wrote down their arguments and proposed a decision to be approved by their supervisor. Some citizens were considered less suspicious than others, in particular, civil servants, or employees who ‘could not have made a hidden profit’ and would benefit from ‘benevolent attention whenever there is no particular reason to believe that they may have lent themselves to tax evasion by having vouchers stamped that do not belong to them’ (Instructions générales et circulaires 1946, 59).

16 The same was true for proving the seniority of cash owned in 1940. 17 Réponse à l’inspecteur de l’Enregistrement, March 1948, Archives de Paris (AP), Paris,

1600W1139, file 6203.

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Examples will help to understand the approach of the controllers and the arbitration they had to carry out, being both circumspect and understanding. Henri Guepratte, a senior attaché at the Ministry of National Economy, living in the 5th arrondissement, took advantage of a favorable prejudice. Asked to prove the seniority of 780,000 francs of Treasury bonds, he explained that his father-in-law had given him the money on various occasions (marriage, births, etc.) before the war. The control officer wrote: Mr. G. is a civil servant of very long standing. His income is that of a civil servant. Logically18 he could not get rich during the war. No other element of his assets indicates this. He has heavy family burdens (three minors are children entirely dependent on him). His explanations seem very acceptable, although not justified, as all the donations were made by hand. It is therefore proposed to admit the seniority of 780,000 francs of Bonds.19

Similarly, the pensioner Cécile Audille, whom we have already mentioned, was able to convince the auditor of her good faith: I have always had vouchers (...). I have always used them as a means of investment, of which I appreciated all the advantages, and I did not think that it would cause me such great concern and anguish today, because I cannot unfortunately provide proof of my subscriptions.20

She only had proof of a 200,000 francs sale in 1943, which did not show that she already owned the bonds in 1939. Yet, the controller accepted her assertions without further proof. It was different for Désiré Cousin, a pork butcher, living at 64 Tiquetonne Street in the 2nd arrondissement. Having declared 710,000 francs of old bonds, he was summoned to the offices to justify their seniority. From the outset suspect, given his very lucrative profession, he further increased the controller’s mistrust by his explanations. Eager to show the importance of his pre-war income, he revealed that he had been lending 18 Underlined in red by the controller. 19 Fiche de contrôle, 15 February 1948, AP, 1600W185, file 5885. 20 Réponse à l’inspecteur, op. cit.

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at usurious rates to poor people since 1930, and that sometimes he had made efforts to have their property seized. Besides this, he had his parents and parents-in-law take out anonymous bonds long ago, which he obviously recovered without paying taxes after their deaths. The inspector stated: The taxpayer turned out to be a very greedy person during our long conversation (…) Thus, even if we admitted the possession of 710,000 francs of Treasury bonds prior to January 1940, the majority of these would have been acquired with the intention of tax evasion. Therefore, in order to counterbalance, if possible, the prejudice suffered by the Treasury on inheritance taxes, it is proposed to maintain 250,000 francs for the old elements and to reclassify 460,000 to the new elements.21

Despite the alleged tax evasion, the auditor had to compromise because the taxpayer was undoubtedly rich before the war. Many other files show compromises, with the inspector affirming the taxpayer’s sincerity but reclassifying one-third or one-half of the vouchers as new property. In this arbitration, material elements, but also occupation, age, or sex played a role. These precise, often fussy controls and adjustments were sometimes erroneous, even abusive, as the case of Marius Leoncino shows. Born in Sicily in 1909, he was working as a bootmaker in the 2nd arrondissement of Paris. Obviously not very comfortable with the subtleties of the declaration, he hadn’t filed it correctly. A tax expert was appointed in 1954 to examine the case because Marius, who had already paid 61,920 francs, still owed 5000 francs. He concluded that the liquidation was unfavourable to him. The lump sum for furniture that was added to its asset increased without reason the new goods, ‘whereas it does not seem doubtful that he owned this furniture on 1 January 1940’. Similarly, his stock of old equipment was not estimated at its 1945 value, which further increased his enrichment. The tax expert also added that some of the sums declared as new items came from payments made by his father, who managed his business during his captivity in Germany. These amounts should have been declared as income and deducted from his enrichment, instead of increasing it. As a result, Marius was not only taxed for 708,378 francs of assets but also for 438,383 francs of wealth gains. He had already paid 12.2% of his taxable wealth, i.e. 8.7% of his total wealth. This was far too 21 Fiche de contrôle, 14 May 1947, AP, 1600W48, file 406.

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much compared to what he should have paid if the audit had been properly carried out. The tax expert recommended that the Treasury’s claim be dropped, as he believed that the sums already paid were more than enough.22 The Treasury, already unduly enriched, followed the advice.

Conclusion There is no doubt that tax evasion reduced the yield of the ISN. Assets held abroad, many of which were not declared to the Exchange Office, were not all mentioned in the files of the wealthiest. Many taxpayers at the tax threshold, on the other hand, did not fill in their declaration, sometimes because they thought these declarations did not concern them, other times to avoid paying tax. Nevertheless, national statistics and Parisian records converge: the work of the Enregistrement ’s inspectors led to numerous adjustments, and maybe a third of all the files were corrected. These controls, important on a psychological and political level, yielded more than 11.5% of the product of the ISN from families, but less than the official figures suggest. Tax evasion and inaccuracies were undoubtedly highly significant, but an examination of the files reveals that the search for ISN cheaters depended a great deal on personal interpretation, particularly regarding the calculation of wealth gains. By revealing the crucial role played by auditors, the files shed new light, from below, on tax evasion and evaders. The Parisian records show that alongside numerous taxpayers of questionable honesty, anxious to minimise their tax, there were also taxpayers of good faith, penalised by their choice of investment, often by their trajectory before or during the war, and sometimes by controllers who were not as neutral or competent as they should have been. There are no records for studying the profile of these employees assigned to ISN, but file surveys in different archives centres would allow comparison of the auditors’ work nationwide. Besides this, a geographical mapping of revenues and offences reported could provide a deeper analysis of tax evaders. In addition to the composition of assets and the level of wealth, other determinants may have played a role in tax behaviour. For example, regions with a tradition of tax resistance may have been more prone to evasion, making the work of auditors even more decisive.

22 Note, 17 October 1954, AP, 1600W68, file 2561.

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Bibliography Annuaire statistique abrégé. 1949. Second volume. 1950. Paris: Imprimerie nationale. Bergère, Marc (ed.). 2008. L’épuration économique en France à la Libération. Rennes: Presses universitaires de Rennes. https://doi.org/10.4000/books. pur.4762. Bouloc, François. 2018. Le recouvrement de la contribution sur les bénéfices de guerre. Une tâche de longue haleine pour les services fiscaux. In Une fiscalité de guerre ? Contraintes, Innovations, Résistances, eds. Florence Descamps, and Laure Quennouëlle-Corre. Paris: IGPD. https://doi.org/10. 4000/books.igpde.5282. Bulletin de la Direction générale des Impôts - Enregistrement - et du service des Domaines. 1949. Delalande, Nicolas. 2011. Les batailles de l’impôt. Consentement et résistances de 1789 à nos jours. Paris: Seuil. Farquet, Christophe. 2012. The International Tax Evasion Market in the Interwar Period. L’économie Politique 54: 95–112. https://doi.org/10. 3917/leco.054.0095. Guérin, Jean. 1949. L’impôt de solidarité nationale (étude comparée). PhD dissertation, Université de Paris. Guex, Sébastien. 2007. 1932: The Tax Fraud Affair and the Herriot Government. L’économie Politique 33: 89–104. https://doi.org/10.3917/leco.033.0089. Hautcoeur, Cyril, and Pierre Sicsic. 1999. Threat of a Capital Levy, Expected Devaluation and Interest Rates in France during the Interwar Period. European Review of Economic History 3: 25–56. Instructions générales et circulaires de M. le Directeur général de l’Enregistrement, des domaines et du timbre. 1946. Paris: Imprimerie nationale. Journal officiel de la République française. 1945. Débats de l’Assemblée consultative provisoire: compte rendu in-extenso. Mémoires. 2004. Hommes et femmes des Impôts. Récits autobiographiques 1920– 1960, I. Paris: CHEFF. Rabault-Mazières, Isabelle. 2020. La justice fiscale au sortir de la guerre: l’impôt de solidarité nationale de 1945. In La Justice fiscale (X e -XXI e siècles), ed. Emmanuel De Crouy-Chanel, Cédric Glineur, and Céline HussonRochcongar, 257–273. Bruxelles: Bruylant Édition. Schaufelbuehl, Janick Marina. 2009. La France et la Suisse ou la force du petit. Évasion fiscale, relations commerciales et financières (1940–1954). Paris: Presses de Sciences Po. Spire, Alexis, and Katia Weidenfeld. 2015. L’impunité fiscale. Quand l’État brade sa souveraineté. Paris: La Découverte. Statistiques et Études financières. 1949/4. Suppléments Statistiques. Statistiques et Études financières. 1952/16. Suppléments Statistiques.

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Tristram, Frédéric. 1997. L’administration fiscale et l’impôt sur le revenu dans l’entre-deux-guerres. In Études et documents, vol. 9, 211–242. Vincennes: CHEFF.

CHAPTER 17

Tax Education After WWII: How Spain, the USA, and West Germany Tried to Make Their Citizens Pay Honestly Korinna Schönhärl, Nasrin Düll, and Nadya Melina Ramírez Lugo

Introduction: Tax Education as One Field of Tax Compliance Improvement A quickly growing social science and economics literature examines the question of how the tax compliance of citizens may be improved. The spectrum of options ranges from stricter enforcement and severer penalties, tax amnesties, a greater say for taxpayers, the reduction of friction

K. Schönhärl (B) University of Paderborn, Paderborn, Germany e-mail: [email protected] N. Düll Goethe University, Frankfurt am Main, Germany e-mail: [email protected] N. M. Ramírez Lugo Mainz, Germany e-mail: [email protected] 355 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1_17

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between taxpayers and tax administration, and the collection of additional data including the intensification of international cooperation between tax administrations, to mention but a few (for an initial overview see e.g. Torgler 2007). There has been growing awareness among interdisciplinary scholars that there are national traditions of taxpaying behavior that have to be considered if one wants to deliver convincing explanations for the present state of tax morale: present taxpaying behavior cannot be explained without looking back in history (Steinmo 2018). Do these different traditions also exist concerning tax education? If so, how and why did these differences arise? With rare exceptions, this question has not yet been subjected to historiographical examination (Likhovski 2017). In this chapter, we follow Assaf Likhovski´s Foucauldian approach, and understand measures to improve tax compliance as attempts by modern states to normalize citizens’ behavior and to eliminate divergence within the population. Thus, the attempts of modern states to reduce noncompliance and “to manufacture model taxpaying citizens” are understood as reflecting “more general attributes of modernity” (Likhovski 2007, 665–666). What techniques, discourses, bodies of knowledge, and media were employed in different nation-states to make their citizens pay honestly? Moreover, what does this tell us about their idea of the ideal citizen in the background? The chapter’s thesis is that tax education provides an extremely suitable probe for understanding the predominating idea of the ideal citizen in a nation. To explore this thesis for the period between WWII and the end of the 1980s, three countries are selected as case studies that represent different “families” or tax systems, as classified by Uwe Wagschal (Wagschal 2005)1 : dictatorial Spain under Franco, after 1975 in transition to democracy, represents the peripheralresidual tax system type; the USA stands for the liberal-conservative; and the Federal Republic of Germany (FRG) for the Christian democratic and continental European tax system type (Wagschal 2005). This necessarily brief chapter outlines some general strands of the ongoing research program to give an idea of the questions being tackled.

1 Wagschal takes into consideration the amount of total liabilities (taxes and fees), the structure of a tax system (including the share of direct and indirect taxes in total revenue, and the relationship of progressive and regressive taxes), the mechanism of tax collection (e.g., share of withheld taxes vs. self-declaration) and additional characteristics.

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Tax Education as “Training in Citizenship”: A Transnational Comparison USA: The International Forerunner in Tax Education Tax Education as War Propaganda In the USA, tax education first emerged as a part of World War II propaganda. This was essential because many Americans had to pay income taxes for the very first time in their lives in 1941. A highly progressive income tax had been introduced in the USA in 1916 and had become even more progressive during the New Deal years from 1935 onwards (Brownlee 1996, 109ff.). But in 1941, the basis of income tax was significantly broadened to finance the war effort: the number of individual taxpayers soared from 3.9 (1939) to 42.6 (1945) million, and yearly federal income-tax collections leaped from $2.2 to $30.1 billion (Brownlee and Boyer 2004). In this situation, the Treasury Department took various measures to convince Americans to pay their taxes voluntarily and honestly. Tax education was practiced via newspaper coverage, radio addresses, the purchase of saving stamps, and the education of schoolteachers (Jones 1996, 111, 117), but also by works of art and culture. For instance, the famous composer Irving Berlin was ordered by Morgenthau to write a song with the title I paid my income tax today, which was then played constantly on radios across the nation as the deadline for income tax declaration, on 15 March 1942, approached (Jones 1996, 122). The short movie The New Spirit is another example of this tax education campaign with emotional and patriotic content (Jones 1996, 125f.; 2018, 207f.). Secretary of the Treasury Henry Morgenthau Jr. commissioned Disney to produce this film as the first of several Walt Disney productions released through the War Activities Committee of the Motion Picture Industry. The series was continued by The Spirit of ‘43 one year later and is part of a body of numerous Walt Disney World War II propaganda films like Food Will Win the War (1941), Donald Gets Drafted (1942) and Commando Duck (1944). The Disney company became part of the American propaganda machine during the war period, producing movies on behalf of various US ministries (Shale 1976, 29–30; Shull and Wilt 2004, 156). Tax education during WW II has been very well researched (Jones 1998, 653–697; Anderson 2020; Dhanesh and Rahman 2021) and has been shown to have argued mainly patriotically.

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The 1950s/1960s After 1945, the argumentation diversified. In this period, a bipartisan consensus allowed the new, progressive mass tax system to continue despite the fact that the special requirements triggered by the war had come to an end. The continuation of taxation was broadly accepted in society because the surplus was used for the social security system. However, wartime enthusiasm in the population declined quickly and, in the first half of the 1950s, there was an increase in anti-tax campaigns by entrepreneurs and lobby groups, which the Bureau of Internal Revenue (created in 1862) had to combat (Jones 1996, 107–110). The pressure to legitimize the work of the Bureau became even stronger when Republicans uncovered widespread corruption within the organization in 1951. Consequently, it was reorganized to minimize political influence and renamed the Internal Revenue Service (IRS) in 1953 under President Eisenhower (Burnham 2015, 201). New tax forms made tax declarations more complicated, rendering explanations necessary. Thus, tax education became even more important for the IRS. The first pillar of IRS taxpayer education was the Taxpayer Assistance Program, which aimed to assist citizens to fill in tax forms correctly. For this purpose, the IRS published tax rulings in its Bulletin to inform taxpayers about court decisions (in 1955 we count 801 published cases, see Commissioner of Internal Revenue 1955, 42). Additionally, information material about the completion procedure was produced: guidebooks for special groups of taxpayers, e.g. a 128-page brochure Your Federal Income Tax and the Tax Guide for Small Business, with a run of 200,000 (Commissioner of Internal Revenue 1959, 57–59). The Farmers Tax Guide was distributed to millions of Americans in the countryside. There was also a Tax Guide for U.S. Citizens Abroad, in addition to various guides about specific tax laws (Commissioner of Internal Revenue 1959, 57–59). In the 1960s, the production of brochures was expanded, e.g., Mr. Businessman’s Kit for small entrepreneurs (Commissioner of Internal Revenue 1962, 4). But information was also spread via mass media from 1953 onwards (Commissioner of Internal Revenue 1954, 56). During the filing season, specials on radio and TV used representatives of the IRS to advertise for the taxpayers´ attention. In 1958 about 175 tax specials were published in newspapers, and IRS advertisements were the second most frequently shown spots on US TV, addressing different groups in society (Commissioner of Internal Revenue 1959, 60). In some of them, IRS members answered concrete questions from the audience.

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But the IRS also tried to address taxpayers on an even more personal level. Thus, firms were trained in assisting their employees to file their tax forms correctly. Assistance via phone was another important cornerstone. During the filing season of 1953, about 12 million citizens used this service (Commissioner of Internal Revenue Service 1954). In 1962, two so-called Tax Clinics were established in New York and Illinois, financed in cooperation with the Small Business Administration. They gave small entrepreneurs the opportunity to gather and to discuss “various aspects of taxation that enter into management decision-making” (Commissioner of Internal Revenue 1962, 8). The concept was broadened to the whole USA in the following years. The second pillar of IRS tax education was the Public Information Program focusing on the legitimization of taxes. Thus in 1959, the movie Since the beginning of time was produced. Amusingly and entertainingly, it explains why society does not work without taxes, starting with cavemen who set a watchman to protect their families from threats while they are hunting and render him part of their daily prey for his service. The narrative moves on to the Boston Tea Party and then through to the present. The movie was shown on TV more than 200 times, reaching a public of about 40 million spectators. It was elected as one of the best documentations in a “selection by the television stations of the country” (Commissioner of Internal Revenue 1959, 60). The 100th anniversary of the IRS in 19622 was celebrated with the festschrift History of the U.S. Taxes and Internal Revenue Service (Internal Revenue Service 1963). The publication shows that communication with taxpayers had become increasingly important in the organization´s selfrepresentation. The aim of this “New Direction” was propagated as a “greater emphasis on voluntary compliance through a more informed taxpaying public” (Commissioner of Internal Revenue 1962, 4). The IRS strongly endeavored to represent itself as a supportive, transparent administration and to thereby foster citizens´ voluntary compliance. One of the primary tasks of Internal Revenue Service is to see that public confidence in the tax system is sustained and strengthened. In seeking this goal, the Service focused attention on doing everything reasonably

2 The appointment of the first Commissioner of Internal Revenue in 1862 by President Lincoln was interpreted as the foundation of the organization, see Internal Revenue Service (2021a).

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possible to encourage more effective self-assessment and voluntary compliance. Taxpayer education and service is one of the major steppingstones to the attainment of this goal (Commissioner of Internal Revenue 1962, 3).

Attention soon also moved to the taxpayers of tomorrow. In 1954 the program Teaching taxes was initiated for pupils between 14 and 18 years of age, later known as Understanding Taxes. In 1959, the Understanding Taxes Program was conducted at more than 22,300 high schools all over the country, but also in the US armed forces, industry, veterans’ hospitals, and even prisons. From 1962 tax education kits were distributed at nearly all high schools in the USA. About 2.7 million handbooks for pupils were distributed among schoolchildren, and 82,000 teachers were contacted. The main narratives of the 1950s and 1960s’ tax education campaigns were to inform citizens about the whys of taxation and to demonstrate the transparency of the tax system, mostly in an entertaining and amusing style. The aim was not only to save money but also to integrate the communities into the state and encourage them to participate actively. However, there was no end to criticism of the IRS being used as a political weapon by politicians against their enemies (e.g. by pressuring the National Association for the Advancement of Colored People in the 1950s and 1960s). President Nixon even seemed to intensify the abusive practice of pursuing political rivals through the IRS (Burnham 2015, 245–252). The 1970s/1980s Serious doubts remain about whether Watergate in 1972 ended the political instrumentalization of the IRS. However, the organization continued to intensify all three pillars of its tax education programs. Firstly, the Taxpayer Assistance Program was reinforced during the 1970s by the Volunteer Income Tax Assistance Program VITA to assist elderly taxpayers in the communities who had trouble with a newly introduced tax form, numbered 1040. Local Taxpayer Education Coordinators (TPEC) educated volunteers, who offered assistance with declarations in their community (Committee on Ways and Means 1978, XIIf.). Additionally, the IRS started a series of “Tax Tips” in some newspapers (Committee on Ways and Means 1978, 23, 64). Secondly, the Public Information Program was also further developed. From 1969, the argumentation narrative changed slightly. The argument that each citizen in democracy had a “Right to Know”

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about government activities became central. “Carrying this concept a step further, the Service believes that the public also has a need to know” (Commissioner of Internal Revenue 1969, 3). Transparency was the command of the hour. The IRS tried to demonstrate this in various media, such as “television, radio, news releases, magazine articles, speeches, slides, pamphlets, fact sheets, posters, displays and exhibits” (Commissioner of Internal Revenue 1969, 4). The material was constantly updated, and the language was simplified to reach additional groups of taxpayers. In 1972, information was also produced in Spanish and special material for deaf people published. The 27-minute film Hey We’re in Business for small entrepreneurs was provided with Spanish subtitles (Committee on Ways and Means 1978, 87, 128). In 1981 resistance against high tax rates was one main factor that brought Republican president Reagan to power, who then dropped tax rates considerably (Brownlee 2018). This trend explains the title of the new IRS campaign Make Your Taxes Less Taxing from 1986, with a budget of 102.6 million dollars. In this campaign, the IRS advertised early filing in the press, radio, and TV, and with posters (Internal Revenue Service 1989, 10), and explained legal ways to optimize taxes. In cooperation with the Public Broadcasting Service, the video series Tax Tips on Tape in 27 parts was produced and distributed to the public media. And a weekly 30-minute live show, where IRS staff answered questions from the audience, was produced in cooperation with the Financial News Network, in addition to various specials in leading newspapers like USA Today (Internal Revenue Service 1989, 10). Thirdly, the Understanding Taxes Program was also further expanded, using the results of evaluation among teachers as a basis for the modernization of material. The “Whys of taxation” were strengthened in the 1980s (Internal Revenue Service 1995, 2). In 1985 a new video series for schools started, and brochures both for pupils and teachers were produced. A video series in six 15-minute parts explained the importance of taxation for society in everyday situations, e.g. little love stories (Internal Revenue Service 1995, 2). In 1987, about 4 million high school students came in contact with the IRS tax education campaigns, and 4,000 teachers were educated (Roth et al. 1989, 34). The Understanding Taxes program is continued until today, and the IRS now provides an interactive learning platform (Internal Revenue Service 2021a). For the year 1987, the IRS claimed that about 45 million Americans (18.5%) were educated in taxation issues (Roth et al. 1989, 34). Although

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the effects of tax education on tax payment behavior were difficult to examine and the high costs of the tax education campaigns had to be repeatedly legitimized in congress, the sheer number of contacts with taxpayers is remarkable, especially in comparison with other countries´ experiences. Roth et al. (1989, 205–206) suggest that working with close personal contacts within the already existing communities was much more successful than the big media campaigns.

Spain: Tax Education Under Dictatorship, Transition and Democracy Tax Education in an Authoritarian Regime Under the rule of dictator Franco, Spaniards had to deal with a completely different tax system, one that mainly kept the structures of the nineteenth century. The tax rate was a very low 10%, indirect taxes were the most important source of revenue, and direct taxes (e.g. of wealth or income) were not progressive. The collection of sparse direct taxes was organized via professional associations, which were responsible for parceling out their tax duty among their members. Where there was direct contact between taxpayers and the tax administration, the tax was determined not according to profit, but according to “objective” attributes like the number of staff or the technical equipment (Comín Comín 1995, 2003, 2015). The profits of the growing industrial sector thus could not be skimmed off by the exchequer. For everybody apart from wage workers and small landowners, tax evasion or avoidance was very easy, and it was not considered or punished as a crime. There were very few tax inspectors, and the tax management was deficient (Comín Comín 2007b). In the literature, the tax system of the autocratic regime is considered an instrument of remuneration for the elites that had supported Franco during the Civil War (1936–1939) and continued to do so after the war ended: the Catholic church, the powerful landowners and the business elites, especially in the financial and banking sectors (Comín Comín 1994). Already in the 1950s, scholars and the administration recognized that tax evasion was a major problem as the government painfully lacked investment funds and discontent among the population was growing (Torres Martínez 1950; Sánchez Asiain 1952; Torres López 1961). Two tax reforms in 1957 and 1964 intended to create a fairer taxation system,

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but this fight via legislation failed continuously. Thus, the economist Fernando Sainz de Bujanda accused the reforms´ inefficiency. He was one of the first Spanish intellectuals who came up with the idea that tax education might be a proper remedy (Sainz de Bujanda 1967, 5). Educated and morally upstanding citizens would consistently refuse collaboration with a corrupt tax administration. Sainz de Bujanda judged the foundation of the Servicio Central de Información in 1958 to be one important step in this direction (Sainz de Bujanda 1967, 148; Ministerio de Hacienda 1962, 60–63) but his main idea was to improve the education of tax administrators at university to make them resistant to corruption (Sainz de Bujanda 1967, 149–150). Independent of Sainz de Bujanda, as early as 1967 the Ministerio de Hacienda (Finance Ministry) started the first tax education campaign on honest tax payment in general, which could be interpreted as a convenient way to avoid other forms of strengthening the fight against tax evasion. Colored graphics and pictures in newspapers and magazines tried to convince the taxpayer of his/her duty, appealing to feelings of solidarity and demonstrating the importance of public services financed by taxes (N.N. 1967, 22). The project was continued in 1969, while Spanish scholars started to publish statistics about the supposedly very high rates of tax evasion (Sánchez Asiain 1963; Gota Losada 1970). In 1970, the Finance Ministry started to advertise tax calendars (“calendario del contribuyente”) in the newspapers, which included information about tax duties and tax days (Ministerio de Hacienda 1970, 37–38).3 From Subjects to Citizens In 1975 Franco died, and the process of the transition to democracy in Spain accelerated. Older historiography celebrated this period in Spanish history as a peaceful finding of compromises between the old Francoists and the new democratic elites, moderated by King Juan Carlos and Prime Minister Adolfo Suárez. From the late 1990s, historians started to question this enthusiastic narrative, focusing on the societal changes in various groups that made the transition possible on the one hand, and on the high costs of the compromises, e.g. the agreement not to clear up the crimes 3 Also normal pocket calendars soon included “calendario del contribuyente”, e.g. N.N. (1970).

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and political suppression of Franco’s rule, on the other hand (Capdepón 2018). However, in June 1977 the first free election in Spain since the pre-Franco era took place, bringing a clear majority for the political center. In an all-partisan consensus in October of the same year, the socalled Pactos de la Moncloa were passed, a reform package including tax reforms that modified the tax system, making it more democratic (Comín Comín 2007a). The quick reforms were possible because already in 1973 and in 1975 a group of reformers in the Instituto de Estudios Fiscales, led by the future Deputy Prime Minister Enrique Fuentes Quintana (1977– 1979), had prepared a comprehensive tax reform plan, which could not be put into practice under Franco’s rule, but was thus prepositioned in 1977 (Torregrosa-Hetland 2021, 6). In the highly politicized situation before the elections in June 1977, the tax administration started its next tax education campaign. Honest tax payment was legitimized as a vote for justice and democracy and therefore viewed as essential for the process of democratization (Ministerio de Hacienda 1977). The consensus in questions of taxation quickly broke after the second democratic elections of 1979, so important parts of the planned tax reform could not be realized. However, 1978 saw a major tax campaign, with the slogan “Hacienda somos todos” (“All of us together are the exchequer”) which is still alive in Spain’s collective memory today (Ministerio de Hacienda 1978).4 This campaign’s main narrative was the argument that due to the new democratic order, the citizens themselves now assigned the parliament (Cortes) that decided about the spending of tax revenues. The national dimension had explicit meaning for the campaign (“By declaring you have to be true to yourself and to Spain,” Ministerio de Hacienda 1976). Declaring was said to be necessary to be “a good Spaniard.” There were various caricaturist criticisms of this campaign, especially from the Conservative side (N.N. 1978). After 1980, the Finance Ministry embarked on tax education at schools. Special videos were produced, which were shown about 400

4 For the remembrance culture, see N.N. (2016), López (2017). In 1988, director Antonio Ozores produced his film “Hacienda somos casi todos”, which deals with the consequences of tax evasion for personal relationships, and was not initiated or sponsored by the Ministerio de Hacienda.

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times that year.5 As teaching material for pupils, the picture book La Hacienda de todos (Everyone’s Treasury) was published, using a transit through history and an explanation of the present system to show the necessity and purposes of public finance and taxes (Sánchez Sanz et al. 1980). In 1978 a No-Do (newsreel for cinema) about honest tax payment and the need for tax liability was produced, advertising the idea that tax evasion is impossible in the USA and this is one reason for their high living standard.6 In 1980 TV was discovered as very usable media for tax education. However, the high costs of production limited the possibilities of the Finance Ministry, compared with the IRS.7 In 1980/1981 most of the short advertising spots on TV presented celebrities, and each one focused on a different argument about why taxes should be paid honestly. For example, in 1980 the actor Emilio Gutiérrez Caba encouraged citizens to pay taxes despite their dissatisfaction with public services,8 in 1981 journalist José María García proposed paying taxes honestly so that taxpayers could not be made responsible for the insufficient quality of public services,9 and actress Bárbara Rey advertised honest tax declaration as a measure to live a contented life.10 For the very carefully prepared campaign of 1980, still under Prime Minister Suárez, the Finance Ministry invested five times the amount of money and personnel than in the years before. Ministerio de Hacienda linked the unexpected high number of five million declarations to the

5 Inspección General del Ministerio de Hacienda: Información y asistencia a los contribuyentes, 3 February 1981, 5, in: Archivo del Ministerio de Hacienda (AMH), Madrid, Caja 1195918. 6 No Do: Revista Cinematográfica Española No. 1.828, Año XXXVI, 6 February 1978, in: Filmoteca Española, RTVE. 7 Ministerio de Hacienda: Campaña de publicidad y divulgación del Impuesto sobre la Renta—1981, in: AMH, Caja 1195918. 8 Ministerio de Hacienda: Impuesto sobre la Renta, TV-Spot with Emilio Gutiérrez

Caba, Mayo 1980, segunda parte, in: Centro de Documentación Publicitaria (CDP), Palma de Mallorca. 9 Ministerio de Hacienda: Impuesto de la renta, TV-Spot with José María García, Mayo 1981, tercera parte, in: CDP. 10 Ministerio de Hacienda: Impuesto de la renta, TV-Spot with Barbara Rey, Mayo 1981, tercera parte, in: CDP.

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campaign.11 It aimed to sensitize the taxpayers to the topic and to motivate them to pay, to communicate the purposes of public spending, and to present the Finance Ministry as modern, transparent, and serviceoriented.12 The campaigns in 1981 and 1982 also discussed the new computerization of tax administration, focusing on the growing likelihood that evaders would be convicted. Explicitly, fear of social stigmatization for evaders was stimulated (Ministerio de Hacienda 1981), very much in contrast to the entertaining, casual, and amusing style of the USAmerican campaigns. Tax campaigns also took place on a local level, e.g. in 1982 the city of Madrid explicitly criticized the central tax system, but in parallel asked its citizens to pay their taxes, which were indispensable for the development of the city (Excelentísima Diputación Provincial de Madrid 1982). The newspaper ABC restarted its tradition of publishing a Guía del contribuyente in the weeks leading up to tax day to assist taxpayers in practical questions of declaration (Ministerio de Hacienda 1982). Tax Education in Developed Democracy In 1982 the Spanish socialist party won the elections and took over the government, which can be considered the end of the transition. The change of government brought a decline in tax education campaigns in the next year, which were then limited to mentions of upcoming tax days and the range of services offered by the Finance Ministry. The widespread tax calendars, however, were given a new design with more pictures and graphical elements that year. In 1984, tax education intensified again, and the Finance Ministry started to include all education activities in their “Memoria” (statement of accounts). They mentioned tax education videos for schools for the first time (Ministerio de Economía y Hacienda 1984d, 286–288). The fear of being convicted was maintained (Ministerio de Economía y Hacienda 1984a), and the antisocial dimension of tax evasion was pointed out (“Is your neighbor letting you down?” and “Those who defraud only contribute to you paying more”; Ministerio de Economía y Hacienda 1984b and 1984c).

11 Inspección General del Ministerio de Hacienda: Información y asistencia a los contribuyentes, 3 February 1981, in: AMH, Caja 1195918. 12 Ibid.

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In 1985, a variety of campaigns were launched, and the Finance Ministry organized and financed the publication of the colored comic El Puente (The Bridge) in Belgian-French Tin-Tin style. The comic told the story of journalist Raul, who ends up on an isolated island where the inhabitants do not yet know of taxes (Ruigómez Iza and Lago 1985). Raul happens to be elected as chief and introduces taxes to enable the construction of a bridge to another village. The construction of a hospital and school makes further taxes necessary. The comic was distributed at schools and youth centers to inform and educate the next generation of taxpayers about their duties. Additional material for teachers provided information and proposed activities like a class visit to the Finance Ministry (Delgado Lobo et al. 2005).13 In 1987, statistics were included in the tax campaign material to show that the number of honest taxpayers was continuously growing, which made the reduction of tariffs possible (Ministerio de Hacienda 1987). In 1988, the computer program P.A.D.R.E. (Programa de Ayuda Declaración Renta) was made available for the broader public for the first time, making declaring easier. Its introduction was accompanied by an intensive campaign in the press, but also on TV (Ferrari 2017). The Memoria of the Finance Ministry mentions public lectures on taxation, personal letters to supposed taxpayers to remind them of their tax duty, the production of video spots and new brochures, also in English for foreign taxpayers (Ministerio de Economía y Hacienda 1988, 344–351). In 1989, a tax amnesty took place, accompanied by the campaign “Ponerse al día no es tan caro” (“Catching up is not that expensive,” Ministerio de Hacienda 1989).

Western Germany: Largely an Abstinence of Tax Education Widespread Tax Evasion After WWII The tax system in Germany was partly taken over by the Weimar Republic and the Third Reich, with minor changes by the foreign occupying forces after 1945. Tax rates after the war were high, with a top income tax rate 13 The authors report that the book was not widespread, because in the end it was not authorized by the Finance Ministry.

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of up to 95%. In addition to making the Germans pay for occupation costs, the Allies had a strong interest in keeping taxes higher in Germany than in their homelands, which in contrast to Germany had won the war (Ullmann 2005, 179). So they refused all German attempts (first by the provisional government, after 1948 by the government of the newly founded FRG) to reduce tax rates. Both German politicians and the press agreed that under these conditions tax morale was extraordinarily bad in the Western part of Germany, although statistics were not available and the figures were only occasionally cited in the debates (Schönhärl 2019b, 175). In this situation, the Finance Ministry under Fritz Schäffer took over American ideas about tax education. Citizens were sent letters with the request to make annual tax declarations, explaining the purposes of spending in detail (Schönhärl 2022). The short movie Putzke wants to know 14 was produced and shown at movie theaters in 1953. In the beginning, it depicts the “little man” Erwin Putzke’s attempts to protest against taxation and later on his insights into the whys of taxation, gained through the assistance and explanations of a member of the German Civil Liberties Union. However, the film was far from a success and was rather perceived as state propaganda by the spectators—in which they did not wish to be involved again after catastrophic experiences during the Nazi Period (N.N. 1953). This might have been one reason why Putzke wants to know remained the only attempt by the Finance Ministry to employ the medium of film for tax education in Germany. No More Tax Education: When the Economic Miracle Starts When the economic miracle gained speed after 1953, the governmental tax coffers filled without any further effort to educate the taxpayers in compliance (Schönhärl 2019b). Subsequently, the tax administration reduced tax education. After 1953, we do not find campaigns in the press or on TV or radio. Even information material was very limited, e.g. an Income Tax Fibula, published first in 1956 with a run of 250,000 (N.N. 1956). Additionally, the tax administration of some of the West German states (responsible for tax administration) produced some information 14 Putzke will es wissen. Director: Peter Pewas. Book: Peter Pewas, based on an idea of R. A. Stemmle and H. Wobser. January 1953. The short film is available at Filmmuseum im Bundesarchiv Berlin or at https://videos.uni-paderborn.de/video/Putzke-will-es-wis sen-FRG-1952/ac91650c0016c4f244b1566f84dfccae.

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material for taxpayers, e.g. an information brochure on the introduction of VAT by Hessen called VAT-Fibula (N.N. 1956, 1968, 1977), or the brochure Tax Tips by Heidi by Nordrhein-Westfalia (Presse- u. Informationsreferat d. Finanzmin. d. Landes Nordrhein-Westfalen 1971), continued as Tax Tips by Heidi, this time by Monica (Presse- u. Informationsreferat d. Finanzmin. d. Landes Nordrhein-Westfalen 1972). Further attempts to inform citizens, e.g. about tax reforms, obviously were not put into practice (N.N. 1974). The central tax administration produced only one tax information brochure for citizens entitled The Federal Budget—Our Money, first printed in 1963, and republished over the next twenty years until 1983 with little updating (Bundesministerium der Finanzen 1983). So, it is not astonishing that at the beginning of the 1980s, the genre of tax tips was taken over by private authors and publishers with the number of tax guides exploding during this decade (e.g. Grün 1989). Even today, however, the state does not educate citizens or youngsters in honest tax payment behavior in the FRG.

Conclusion and Open Questions What we can observe from the comparison is that the USA developed into the international champion of tax education during WWII, and continued in this position during the research period with high investments in tax education; Spain, on the other hand, started educating its taxpayers much later (although still during the dictatorship), and continued through the process of democratization and afterward, imitating examples from the USA both in terms of content and media. Even if the funds that could be employed were very limited compared to the USA (concrete numbers of spent resources have still to be established), the tax administration developed and practiced tax education intensively under governments with different political orientations. A further research question is to find out when and how Spanish tax administrators came in contact with USA tax education ideas and practices. Did American tax advisors, e.g. within the fiscal committee of the OECD, play a role? In Western Germany, where the presence of American tax advisors after WWII seems very likely (this needs to be verified), the tax administration started to imitate US tax education campaigns in the period of US, British, and French occupation after WWII. But in the mid-1950s, the German tax administration abruptly ceased all attempts to educate taxpayers. It did not further invest

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in tax education, apart from some very basic information brochures. This did not even change after the many tax scandals of the 1970s and 1980s (Schönhärl 2019a). The FRG never restarted serious attempts at tax education. Therefore, what we can observe in the three case studies is the development of very different tax education traditions or even their wide lack. The reasons for the remarkable differences are not easy to explain. Certainly, characteristics of the tax administration may play a role (federal tax administration in the FRG). Additionally, the structure of the tax system and the structure of the labor force may be meaningful, e.g. the percentage of self-employed with broad freedoms in declaring compared with the percentage of wage earners, subject to deduction at source. Nevertheless, in Spain, these numbers changed obviously and strongly during the research period without affecting the efforts made in tax education. One could also argue that during the economic miracle after 1953, German tax revenue was so great that tax morale was not discussed in public anymore, despite some tax scandals in the 1970s and 1980s (Schönhärl 2019a). Therefore, there was no urgent need to educate taxpayers despite the widespread occurrence of tax evasion. However, the 1950s were a boom period for the US economy as well (despite growing deficits on the federal level), and the IRS nonetheless continued to educate its citizens on taxation issues. Moreover, the FRG did not even restart tax education in the period of crisis “after boom” from 1973 onwards, when tax revenues collapsed and debt grew. We may come closer to a convincing explanation if we go back to Assaf Likhovski´s approach mentioned at the beginning of this chapter. Likhovski understands measures to improve tax compliance as attempts by modern states to normalize citizens’ behavior and to eliminate divergence. Obviously, the ideal of the perfect citizen in Western Germany was very different from the US American and Spanish ideals (the latter of course in strong transition during the research period). The Platonic idea that you can improve taxpayers’ behavior by simply informing them about their rights and duties, the strong belief that well-informed citizens will act correctly, seemed to have been widespread in the US tax administration, with the determining argumentation to abolish the differentiation between the citizens on the one hand and the state on the other and to put both on an equal footing. Similar narratives became more and more popular in the Spanish Ministerio de Hacienda (even if aspects of control were intensified here during Socialist rule, in addition). In the

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FRG, however, the Platonic idea of tax education never gained ground. Until today: the German tax administration does not even think it worth a try to persuade taxpayers by informing or entertaining them. To understand this difference, further transnational research on (the lack of) tax education strategies is necessary

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Index

Note:The page numbers followed by ’f’, ’m’, ’n’ and ’t’ represents figures, maps, footnotes and tables. A Active (predatory) role of tax havens, 19–23, 26–29 Addington, Henry, 180–181 Advance tax rulings, 43 Afonso, Whitney B., 115 African tax havens, emergence, 48f Agt, Andreas van, 106 Ajam, Maurice, 20 Alink, Matthijs, 4–5 Amnesties. See Tax amnesties Anti-BEPS measures, 142–143, 144, 154 Anti-money laundering, EU rules, 167–168, 168–169 ARCIS freeport, New York, 164 Ardant, Gabriel, 14 Art market use of luxury free ports, 159, 164–167, 169–170 Asian tax havens, emergence, 48f Audille, Cécile, 349, 350

Auriol, Vincent, 320, 321, 333–334 Austria-Hungary, 191–192 B Bahamas, 46 Baldacchino, Godfrey, 6 Banking secrecy, 142 in Switzerland, 41, 113, 162–163, 346 Base erosion and profit shifting (BEPS) measures, 143, 144, 153–154 Basel-Stadt canton, Switzerland, 16–17, 124 Basquiat, Jean-Michel, 166 Bastiat, Frédéric, 15 Baudouin-Bugnet, Henri, 324–325 Bedouce, Albert, 275 Beer, Sebastian, 150 Belgian tax haven (1890–1914), 9, 296

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 S. Guex and H. Buclin (eds.), Tax Evasion and Tax Havens since the Nineteenth Century, https://doi.org/10.1007/978-3-031-18119-1

377

378

INDEX

British capital flight to, 295–296 conclusions from study, 88–91 fiscal conservatism underpinning, 74–78 introduction to study, 8–9 military expenses pressuring tax policies, 78–81 tax measure proposals, 81–87 tax measures adopted, 87–88 BEPS (base erosion and profit shifting) measures, 142–143, 144, 153–154 Bergius, Carl Julius, 184–185 Berlin, Irving, 357 Bermuda, 41, 143, 148, 303 Bernard-Raymond, Pierre, 281 Birchler, Urs, 18 Bird, Frederick L., 242–243 Blot, Robert, 331–333, 334 Bokanowski, Maurice, 321 Bolwijn, Richard, 150 Bourdieu, Pierre, 16 Bouvier, Yves, 164, 167 Bremen, 186–189. See also Germany, income tax evasion and avoidance Bretton Woods system, 46, 51 British Virgin Islands, 143, 148 Broqueville, Charles de, 78, 79, 82 Brousse, Emmanuel, 272 Brown, Kate, 170 Bullock, Charles J., 201, 202

C Caillaux, Joseph, 76–77, 90 Calvão, Filipe, 162 Canada, 302–303, 308 Capital mobility, 51 Caribbean tax havens, emergence, 48f Cayman Islands, 143, 148, 309 CFC (controlled foreign company) rules, 141, 146, 147t, 153–154

Chaban-Delmas, Jacques, 280, 282 Chambost, Edouard, 43–44, 49n12, 311 Channel Islands, 148, 299–301 Chavagneux, Christian, 2, 25–26 Chéron, Henry, 320–321 Chezleprêtre, Jacques, 326 Chiozza Money, Leo, 15 Christiaens, Alain, 281 Clavier, Charles, 89 Colijn, Hendrikus, 99, 107 Colonialism and tax havens, 50 Common law systems, 50–51 Conduits. See Corporate tax havens and conduit countries; Luxury free ports Constantin, Jeanne, 269 Controlled foreign company (CFC) rules, 141, 146, 147t, 153–154 Cook, Dee, 266 Corporate tax havens and conduit countries (21st century) characteristics, 143–145 introduction to study, 139–143 tax avoidance use, combating, 153–154 trends in tax avoidance use data sources and proxy measures, 145–146 FDI positions, 142, 148–150, 149f international payments for IP rights, 150, 151f, 152 statutory tax regimes, 141–142, 141f, 145–147, 147t treaty shopping and profit shifting, 150–153, 152t Cosson, Jean, 282 Courtin, René, 342n12 Cousin, Désiré, 350–351 Curaçao, 50, 102

INDEX

Royal Dutch Shell Group in, 94, 99–101 Cyprus, 144–145

D Dallolio, Alfredo, 223–224 Damgaard, Jannick, 148–150, 153 Dausset, Louis, 275 Davignon, Julien, 80 Decolonisation, 46, 50–51 Delalande, Nicolas, 266 Delaware, 9, 26, 43n6, 165, 170 Deligne, Maurice, 321–322 Democracy in tax havens, 51 Dharmapala, Dhammika, 43, 51, 153–154 Diephuis, J.H., 105 Direct taxation, introduction Belgian resistance to. See Belgian tax haven in France, 46, 75, 272, 319 in German states, 179–180, 182–183, 186–189, 190–192 in Switzerland, 61. See also Vaud, special tax regime for wealthy foreigners and tax haven emergence, 14–15, 46, 47–49, 48f, 60–61 in United Kingdom, 180–182, 291–292, 294–295 in United States, 294, 357 Doggart, Tony, 4 Dorgères, Henri, 276 Double tax treaties, 146, 147t treaty shopping and profit shifting, 150–153, 152t Doumer, Paul, 321 Dubochet, Julien, 60 Dumont, Charles, 90

379

E Education initiatives. See Tax education, comparative study (1940s–80s) Einaudi, Luigi, 224, 232, 236 Emergence of tax havens. See also Tax havens corporate tax havens. See Corporate tax havens and conduit countries dataset construction, 40–44 enforcement against, early absence, 20–22, 293 explanatory factors attitudes to paying tax, 13–17 direct taxation. See Direct taxation, introduction pull factors, 17–19, 49–51 tax burdens, 11–13, 23 historiographical analysis, 2–6 introduction to study, 37–40 limitations of study, 6, 42–43 new periodization of, 7–13 particular havens. See Jurisdiction name timing of, 44–46, 45f, 60–61 Esslen, Joseph, 207 EU anti-money laundering rules, 167–169 Eurodollar markets, 46, 51 F Fabius, Laurent, 284 Fabri, David, 6 Farquet, Christophe, 292 FDI positions of corporate tax havens/conduit countries, 142, 148–150, 149f Feldstein, Martin, 115 France Belgium, French capital flight to, 22, 77, 85

380

INDEX

direct taxation, introduction, 46, 75, 272, 319 non-French securities, tax exemption for, 294 Switzerland, French capital flight to, 22, 75, 76, 275–276, 340, 346 tax enforcement. See France, tax enforcement France, National Solidarity Tax (1945) enforcement anti-evasion measures from outset, 339–340 conclusions from study, 352 evasion and avoidance, estimated extent, 344–346 file-checking, 346–348 inspectors’ decisions and arbitration, 348–352 introduction to study, 337–339 provisions of tax, 339 upstream evasion, campaign against, 341–343 France, tax enforcement conclusions from studies, 284–285 criminal sanctions (1805–99), 267–271 criminal sanctions (1900–36) and amnesty (1924), 271–278 criminal sanctions (1945–2010s), 278–284 effectiveness assessments (1928 and 1929), 324–325 introductions to studies, 265–267, 317–319 in National Bloc era (1919–24), 319–324 of National Solidarity Tax. See France, National Solidarity Tax (1945) enforcement reforms (1930s and 1940s), 325–328

reforms (1950s and 1960s), 325–333 Franck, Louis, 10, 28 Franco, Francisco, 362–363 Free ports. See Luxury free ports Freycinet, Charles de, 60 Fuentes Quintana, Enrique, 364 G Garcia-Bernardo, Javier, 144 García, José María, 365 Garnier, R., 5 Geneva. See also Switzerland emergence of tax haven, 56, 61, 64, 67–69, 71 free port, 161–164, 166–167 lump-sum taxation (forfait fiscal) in, 123–124 Swedish expatriates in, 122, 124, 123f, 125f, 127–128, 127m, 128m, 132, 133–134 Geography of tax havens, 49–50 Gerloff, Wilhelm, 11 Germany, income tax evasion and avoidance (1850–1920) direct taxation, introduction, 179–180, 182–183 in Bremen, 186–189 in Saxony, 190–192 introduction to study, 179–180 Prussia, anti-tax evasion law, 183–185, 185–186, 185t Reich laws, 180, 196–197 Saxony, tax evasion and avoidance in, 192–194, 195–196 top rates of tax, state-level comparisons, 194t Germany, tax education, 367–369, 369–370 comparative study. See Tax education, comparative study (1940s–80s)

INDEX

Gilbert, Donald W., 242 Giolitti, Giovanni, 227 Giscard d’Estaing, Valéry, 279–280, 282, 334 Glarus canton, Switzerland, 9 Goetz, Paul, 160 Gompertz, Will, 162 Great Depression, property tax delinquency (1929–36) city authority responses, 244, 258 contributory factors, 242–243, 246–249, 253t, 258 data for study, 244–245, 246t extent and trends, 245, 247–252f impact on municipal revenues, 243, 251–252f, 254–256, 255t introduction to study, 239–241 limitations of study, 256–257 organisation as movement, 242, 243–244 policy implications of study, 257–258 property tax, significance in era, 241–242, 252f Grossmann, Eugen, 215–216 Guepratte, Henri, 350 Guernsey, 9, 300–301 Guex, Sébastien, 43n6, 45, 49n12, 89, 162, 301 Guides to tax haven laws, 43–44 Guillaume, Gustave, 80 Gutiérrez Caba, Emilio, 365

H Harrington, Brooke, 51n13 Helgadottir, Oddny, 159 Hines, James R., 43, 51, 139–140 History of tax havens. See Emergence of tax havens Holding companies, 94, 95, 297–303 Hollis, James, 3, 21, 45

381

Honegger, Fritz, 216 Hong Kong, 140, 144, 148, 161 Hopkins, Richard, 306 Hummler, Konrad, 17

I Idenburg, Alexander W.F., 97 Income tax, introduction. See Direct taxation, introduction Information exchange agreements, 163 IP rights, international payments for, 150, 151f, 152 Ireland, 144, 148, 292 Islands as tax havens, 28, 49–50 Isle of Man, 301 Italy, war profits and tax evasion (1915–24) conclusions from study, 237–238 introduction to study, 223–224 tax administration innovations, 232–234 tax evasion, extent, 235t, 236t tax evasion, main practices, 227–232 war profits tax introduction, 224–227 Izawa, Ryo, 94

J Japan, 141–142, 146 Jersey, 9, 148, 299–301 Johns, Anthony, 300 Juan Carlos of Spain, 363

K Kamprad, Ingvar, 112, 128n7 Keen, Michael, 24–25 Kennan, Kosuth Kent, 190–191 Kinsella, Eileen, 164

382

INDEX

Kleven, Henrik Jacobsen, 115 Klotz, Louis-Lucien, 273 Kommer, Victor van, 4–5 Korver, Ron, 162 L Lacaze, marquis de, 268 Lafont, Ernest, 273 Lamoureux, Lucien, 325–326 Lane, Philip R., 140, 142, 148, 153 Lascoumes, Pierre, 266 Lasteyrie, Charles de, 274, 322 Lecanuet, Jean, 281 Lefebvre, René, 273 Lejour, Arjan, 144, 146, 147t, 148, 151 Leo XIII, Pope, 89 Leoncino, Marius, 351–352 Leopold II of Belgium, 78 Le Paige, Remy, 77 Leroy-Beaulieu, Paul, 15, 19, 28 Levie, Michel, 79, 80, 89, 90 Liberia, 49 Liebaert, Julien, 83, 90 Likhovski, Assaf, 290, 312–313, 356, 370 Lindgren, Astrid, 118 Lindkvist, Hans, 121, 122t Lloyd George, David, 295–297 Loucheur, Louis, 16 Loudon, John H., 101–102 Luxembourg as corporate tax haven/conduit country, 140, 144, 148 free port, 164–165 tax rulings in, 41, 43n5 Luxury free ports art market use, 159, 164–167, 169–170 EU regulation of, 167–169 Geneva free port, 161–164, 166–167

history of free ports, 160–161 introduction to study, 159–160 United Kingdom, ports development proposal, 160, 168–171

M Malta, 144–145 Mandatory Palestine, 302 Masters, Colin, 290, 292, 310, 311 Mauritius, 41 Mayor, Rodolphe, 60 McKenna, Christopher, 3, 21, 45 Medici, Giacomo, 166 Meisel, Franz, 184–186, 185t, 192, 218–219 Milesi-Ferretti, Gian M., 140, 142, 148, 153 Mintz, Jack M., 145 Mitterrand, François, 283 Mobility of capital, 51 Monaco, 302, 308–309 Money laundering, 17–18 luxury free ports use. See Luxury free ports Morgenthau, Henry, 357 Morrison, William, 304 Mounier, Edouard, 270–271 Moutet, Marius, 275 Multinational corporations Royal Dutch Shell Group study. See Royal Dutch Shell Group tax avoidance by, 1–2. See also Corporate tax havens and conduit countries Muralt, Jean de, 65 Murphy, Richard, 2, 25–26 Mussolini, Benito, 237

INDEX

N National Solidarity Tax (France). See France, National Solidarity Tax (1945) enforcement Netherlands as corporate tax haven/conduit country, 45n7, 144, 148 and Curaçao, 50 Royal Dutch Shell Group in, 95–99, 105–107 New Caledonia, 40 Newfoundland, 301 New Jersey, 9, 43n6 Nicoud, Gérard, 281 Nijst, J.J.M.H., 94 Nobs, Ernst, 213, 215 Non-domiciliaries regime (UK), 123, 294, 312 O Oceania tax havens, emergence, 48f Offshore financial centres, 28, 140, 144. See also Corporate tax havens and conduit countries; Luxury free ports; Tax havens Offshore holding companies, 297–303 Ogle, Vanessa, 3, 4, 7 Oppenheim, Adriaan S., 97–98 P Palan, Ronen, 2, 4, 13, 43, 50 ‘tax haven’ definition, 25–26, 89 Palestine, 302 Pandora Papers data leak, 43n6, 166–167 Papon, Maurice, 282 Pecher, Edouard, 85, 87 Peel, Robert, 181 Petit, Guy, 278 Phantom FDI, 148–150 Pinay, Antoine, 329, 333

383

Pistor, Katharina, 41 Pitt, William (the Younger), 180 Pleven, René, 337, 341 Pleyte, Cornelius M., 99, 107 Post, Erik, 162 Poujade, Pierre, 279, 281, 331 Powell, Geoffrey Colin, 40 Predatory role of tax havens, 19–23, 26–29 Prince Edward Island, 301 Profit shifting and treaty shopping, 152–153, 150–152t Progressive income tax, introduction. See Direct taxation, introduction Prussia, 185–186, 183–185t, 294. See also Germany, income tax evasion and avoidance Puerto Rico, 154

R Randin, Arthur, 55 Rausing, Ruben, 112 Rawlings, Gregory, 50 Reagan, Ronald, 361 Reinach, Théodore, 278 Rey, Bárbara, 365 Ribot, Alexandre, 320 Ricard, Louis-Etienne, 268 Ricardo, David, 14 Rice, Eric M., 140 Riet, Maarten van ‘t, 144, 147t Royal Dutch Shell Group conclusions from study, 107 Curaçaoan tax concessions to, 100, 102–104 Dutch tax avoidance attempt, 95–102 introduction to study, 93–95 ‘Shell-sweetener’ controversy, 105–107 tax evasion in Curaçao, 101–102

384

INDEX

Royalties, international payments for, 152t Ruppenthal, Karl, 185 Rybolovlev, Dimitry, 164, 167

S Saget, Jean-Baptiste, 273 Sainz de Bujanda, Fernando, 363 Sassen, Saskia, 168 Saxony, 190–192, 192–194, 195–196. See also Germany, income tax evasion and avoidance Say, Jean-Baptiste, 14 Scalarini, Giuseppe, 224 Schäffer, Fritz, 368 Schanz, Georg von, 16 Schollaert, François, 78 Schumpeter, Joseph, 22 Schwarzwälder, Herbert, 187 Seelkopf, Laura, 45n8, 47 Shanghai, 161, 164 Shell Oil. See Royal Dutch Shell Group Singapore, 140, 143–144, 148, 164–165, 170 Slemrod, Joel, 25 Slobbe, Bartholomaeus van, 101 Small nations as tax havens, 49–50 Sollitt, Lucy, 170 Spain, tax education, 362–367, 369 comparative study. See Tax education, comparative study (1940s–80s) Spire, Alexis, 15 Spoerer, Mark, 7, 19–20, 94 Standard Oil, 94 Stee, Alphonsus van der, 106 Steinmo, Sven, 5 Stevens, Robert, 311 Stopforth, David, 290, 299 Streuli, Hans, 217

Suárez, Adolfo, 363, 365 Suárez Serrato, Juan Carlos, 154 Sutherland, Edwin, 266 Swedish expatriates in Switzerland (1960s–1980s) introduction to study, 111–114 as lump-sum taxpayers, 131–132, 130–131f motives for relocation, 114–117, 134–135 patterns of immigration, 119–120t, 121–123 by canton, 121–122, 123–125f, 126–128m correlated to wealth of locations, 128–130f socio-economic profile, 132–134t sources and data for study, 117 Swedish and Swiss tax systems compared, 118–119 Switzerland banking secrecy in, 41, 113, 162–163, 346 as corporate tax haven/conduit country, 144, 148 French capital flight to, 22, 75, 76, 275–276, 340, 345–346 legal systems supporting tax havens, 42, 50 Swedish expatriates in. See Swedish expatriates in Switzerland Switzerland, emergence of tax havens false claim about, 4 generally, 8–9, 44–45, 60–61, 118–119, 122–124, 139, 180, 301 in Geneva. See Geneva and luxury tourism, 7–8, 58–62, 68–69, 70–71 in Vaud. See Vaud, special tax regime for wealthy foreigners Switzerland, tax evasion

INDEX

extent, estimates of, 215–216 federal withholding tax (1944), 216–217 whistleblowing to German authorities, 195 in Zurich. See Zurich, tax evasion

T Takken, Johannes, 97 Tax amnesties in France, 275, 329–330 in Spain, 367 in Zurich, 212, 214t, 218 Tax education, comparative study (1940s–80s) conclusions and open questions, 369–371 introduction, 355–357 Spain, 362–367, 369 United States, 357–362, 369 West Germany, 367–370 Tax enforcement BEPS (base erosion and profit shifting) measures, 142–143, 144, 153–154 in France. See France, tax enforcement in United Kingdom, 266, 277. See also UK anti-tax haven legislation (1936) Tax evasion and avoidance explanatory factors, 239–240, 257–258 Great Depression case study. See Great Depression, property tax delinquency tax burdens, 11–13, 23 historiographical analysis, 2–6 luxury free ports use. See Luxury free ports

385

by multinational corporations, 93–94. See also Corporate tax havens and conduit countries in particular jurisdictions. See Jurisdiction name terminology, 23–24 Tax havens. See also Emergence of tax havens common law systems, 50–51 corporate tax havens. See Corporate tax havens and conduit countries definitions, 24–29, 38, 40, 89, 143 governance systems, 51 islands and other small nations as, 28, 49–50 legal reforms creating, 38, 40–41, 42, 46 luxury free ports. See Luxury free ports motives for relocation to, 114–117 particular havens. See Jurisdiction name predatory role, 19–23, 26–29 terminology, 20, 26–29 UK legislation against. See UK anti-tax haven legislation (1936) uses of, 38–39 Tax regimes characteristics, 45n8 corporate income and dividend tax, 141–142f, 145–146, 146–147t, 154 in particular jurisdictions. See Jurisdiction name and tax haven emergence. See Direct taxation, introduction Tax rulings, 43 Tobler, Stefan, 4 Tørsløv, Thomas R., 152

386

INDEX

Tourism and tax havens, 7–8, 18, 50, 58–62, 68–69, 70–71 Touron, Eugène, 28 Treaty shopping and profit shifting, 150–153t U UK anti-tax haven legislation (1936) background offshore holding companies and trusts use, 297–303 offshore tax avoidance pre-1914, 291–297 enforcement problems, 307–312 introduction to study, 289–291 judicial and legislative dilution of, 312–313 proposals for, 303–306, 309 provisions, 306–307, 311 reception, 307–308 United Kingdom as conduit country, 144, 145 corporate income tax regime, 141–142, 146 direct taxation, introduction, 180–182, 292, 294–295 free ports development proposal, 159–160, 168–171 non-domiciliaries regime, 123, 294, 312 tax enforcement, 266, 277. See also UK anti-tax haven legislation (1936) and Vanuatu, 50 United States ARCIS freeport, New York, 164 corporate income tax regime, 141–142, 146 Delaware and New Jersey, 9, 26, 43n6, 165, 170 direct taxation, introduction, 294, 357

property tax delinquency (1929–36). See Great Depression, property tax delinquency tax avoidance, impact on, 151 tax education, 357–362, 369 comparative study. See Tax education, comparative study (1940s–80s)

V Vanuatu, 50 Vaud, special tax regime for wealthy foreigners beneficiaries (data from 1918–1956), 56–57, 57–59, 58f first legislative framework, 61–63 introduction to study, 55–56 lump-sum taxation (forfait fiscal) reform, 56, 57, 64–67, 123–124 minimal revision (1947–1959), 67–70, 71 objectives, 58–60, 70–71 revenues generated (data from 1918–1960), 59f Swedish beneficiaries, 122, 123f, 124, 125f, 127–128, 127m, 128m, 132 Virapoullé, Louis, 282, 283 Voges, J., 102 Voûte, Caroline, 4 Vyvere, Aloys van de, 90

W Wagschal, Uwe, 356 Walder, Jakob, 205, 206 Walt Disney Co., 357 Wauwermans, Paul, 83

INDEX

Wealth tax (France). See France, National Solidarity Tax (1945) enforcement Weber, Max, 22 Weeks, Samuel, 164 Wells, David Ames, 5 West Germany, tax education, 367–369, 369–370 comparative study. See Tax education, comparative study (1940s–80s) Wheatcroft, George, 311 Woeste, Charles, 83 Worthington-Evans, Laming, 297 Wrobel, Marian Vaillant, 115

Y Young, Cristobal, 115

387

Z Zarobell, John, 161, 163 Zucman, Gabriel, 139 Zurich. See also Switzerland Swedish expatriates in, 121–122, 123f, 127–128 tax evasion (1860–1945) amnesty (1936), 212, 214t, 218 conclusions from study, 217–219 extent and social distribution, 202–203, 203f, 204–205, 204t, 205–208, 205t, 208–209, 208t in interwar period and World War II, 212–214, 213f, 214–217, 214t introduction to study, 201–202 political mobilisation before World War I, 209–212 Zweifel, Paul, 193