August 1, 2012

There are so many bad things about this proposed tax that it is hard to know where to start! The foundation of the lunacy surrounding this approach lies in the fact that this attempt to tax and spend our way out of financial trouble has been tried repeatedly over the course of history and failed miserably each time. And the most recent example of that failure is just north of us in the USA. We always seem so determined to follow the policies of other countries just because they are bigger. We should learn from their mistakes instead of having to make them ourselves before we learn. Isn’t that the major benefit of studying History?

Let’s consider the negative aspects of this proposal:

1. From a marketing perspective we are giving up the single most important value proposition that the Cayman Islands has to offer our investors. i.e. no direct taxation in a world where taxation is on the increase everywhere else. In doing so we will have lost the primary advantage that distinguishes Cayman from the rest of the world and fallen directly into the hands of our competition.

2. Further if we create a system of collecting taxes, no investor will trust that 10% will not change to 20% and that taxing payroll will not change to taxing income on residents and then investors. They will not trust or believe it will stop there – once a tax system is put in place it invariably becomes the thin end of the wedge and taxes never go down in places where such systems have been instituted. Any investor with a rudimentary understanding of history will see that this 10% tax is just the start of bigger taxes to come. The specter of higher taxes and therefore lower returns cannot possibly attract inward investment.

3. The real estate industry has already started to witness what could be an outward flow of investors from the market, with numerous deals either put on hold or canceled. Apart from the certainty that this will reduce Government Income in the short term, it could very well lead to an outward exodus of tax sensitive investors to other jurisdictions, leading to reduced income in the long term as well.

4. Starting with the most recent ill advised stamp duty law which for the first time created differing rates for Caymanians and for expats, we have begun to encourage divisiveness between two groups who have hand in hand built the Cayman Islands into what it is today. This is a sad and totally unnecessary development. Foreigners and expats will eventually take affront to this and leave. And once this tax is in place, and those taxed decide to leave, this will be applied to Caymanians; and at an ever increasing rate.

5. Government’s overspending is where this problem started in the first place. The problem of bloated inefficient or unnecessary Government is never going to be solved if we give the politicians a new and unlimited source of funds to continue to pay for it. This will make the country further dependent upon Government for jobs and eventually entitlements (handouts). In that way this is actually a prime re-election tool for any Government which survives its implementation.

6. Assuming direct taxation was either a proper or the only solution (which it most definitely is not!) the costs to create an accounting and collection system will likely be more than the revenue collected. Further, the information required to do this accounting and collection will destroy what is left of Cayman’s “Confidentiality” platform and further erode any potential for inward investment in that regard.

7. If payroll tax is implemented, all Cayman companies will have to keep proper, and most likely, audited books. Otherwise, there would be no way for the government to really assess what employees are paid. This will cause the cost of business to go up considerably for those compliant with the law. But, as everyone knows from the compliance levels with respect to the Pensions and Insurance Laws, there will be large numbers of companies that ignore the law. This law is so expensive that it will likely cause even more employers to go rogue. Just like in other tax jurisdictions, you will see employees working “under the table” and an increase in illegal expat workers. There is no way Cayman’s justice system will be able to keep up with the workload.

8. Government must be run like a business. In times of prosperity it can expand, (still ensuing it keeps a reserve fund for bad times). In bad times it must contract and reduce its size and expenditure to get back to a break even level. Those are basic economic concepts. Every Caymanian business which has survived from 2008 – 2011 has had to do this. The deficit which will result in not following these basic economic principles, will fall upon all of us – and our children. It is unrealistic to think that any of us can be completely protected by Government from the economic realities of the day: not an inefficient private enterprise, and not an inefficient Government Department. There is no free lunch. Someone ALWAYS has to pay.

This is not just some minor tweaking being proposed by Government. It is a paradigm shift in our country’s approach to funding its liabilities. And if enacted, it will forever change the way we do business in Cayman. To pay for failed policies by destroying the very economic engine which provided the prosperity to which we all strive to return is an absurd response. In fact, it is so absurd we are wondering whether this is a red herring – a cover for some other “creative” revenue measure which will shortly be sprung on us.

Now is no time for grasping at straws. Now is the time for sucking it up, doing more with less, and hanging in there. It is the only way to ensure we will be able to enjoy the fruits of our sacrifice, like our parents and grand parents before us. Any proposed direct tax schemes must be scrapped and the real problems solved!