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The Isle of Man is a tax haven – but its prosperity has precarious roots

Before financial services, the Isle of Man’s economy relied on tourism.

It’s not since 1973 that the Isle of Man has sat so firmly in the cross-hairs of British media attention. In August that year, a disastrous fire at the Summerland resort claimed the lives of 50 holidaymakers. Now it is the Paradise Papers revelations about tax avoidance which have focused international interest on this windswept, semi-sovereign island.

The links between the two events are not as tenuous as it might seem. Both were the result of inadequate regulation and scrutiny. The materials used in key parts of Summerland were not fire retardant – nor did they need to be, in accordance with Manx building regulations at the time. And if the Summerland precedent is anything to go by, the ensuing legislative clampdown on tax avoidance will deliver rapid reform. But a knee-jerk reaction, in this instance, could inflict more harm than good.

British media reactions in the wake of the Paradise Papers leak have been savage, and rightly so. Legal loopholes exploited by British Crown Dependencies have facilitated tax avoidance on an immense scale, depriving the government (and ordinary citizens) of money that could be channelled into public services. But to condemn the Isle of Man is to miss the point.

The remains of Summerland. iom_mark/flickr, CC BY

That jurisdiction (and many others) has been operating within perfectly legal parameters set by the UK government. For UK ministers to express surprise and distaste at revelations exposed by the leak is nothing short of political theatre. There seems to be an embedded belief that when you reach a certain income threshold, your societal obligations diminish, and you are perfectly entitled to squirrel away money in offshore financial centres. This has to change – but it can’t happen overnight.

Proceed with caution

Cautious reform is required. Contrary to popular depictions currently circulating, the Isle of Man is not some kind of financial rogue state, a chillier Monaco, or an English-speaking Switzerland, sitting adrift in the Irish Sea. A cursory look around its main towns of Douglas, Peel, or Ramsey tells a different story. The shadows of the old seaside economy are everywhere, which creak into life during the annual TT motorcycle festival.

A walk around the backstreets of Douglas reveals bleak terraces of former boarding houses, in varying states of decay, converted into low rent flats. Social deprivation afflicts the capital, Douglas, as much as any other seaside town in the British Isles.

Immediate sanctions against offshore jurisdictions will not hurt the affluent beneficiaries of tax avoidance. It will hit hundreds of ordinary Manx families dependent on the financial services sector for employment. And I’m not talking about solicitors, asset managers and bankers – I’m talking about cleaners, IT technicians and receptionists.

If banks flee the Isle of Man, local residents will suffer. Culture Vannin/flickr, CC BY-SA

Capital flight has occurred before. From the 1960s, cheap continental package holidays eroded the allure of a Manx visit, the island’s economic mainstay since the 1880s. Its entire economic structure was geared towards servicing the needs of the “visiting industry” (to adopt the colloquial term for tourism). Manx prosperity was tied to the disposable income of holidaymakers.

Casino capitalism

A 1969 government report noted that collapse of this sector “could only mean that the standard of living of the Isle of Man would disappear and the island would become depopulated”. Casino capitalism was offered as a cure to revive the ailing holiday trade, against a backdrop of fierce moral opposition.

The first licensed casino in the British Isles, opened in Douglas by Sean Connery in 1966, was opposed by some Manx politicians on the grounds that it made the Manx treasury subservient to taxation revenue procured from multinational gambling magnates.

Today, the global headquarters of an online gambling business occupies a symbolically commanding position overlooking Douglas Bay. Meanwhile, casino capitalism in the form of multinational finance is indeed the roulette wheel which supplies the island’s economic lifeblood.

Dependency on offshore financial services – facilitated by Thatcher-era deregulation – stabilised the Manx economy. But alarmed Manx nationalists, fearful of the cultural cost, railed against it. This was expressed most vividly in an arson campaign by the protest group FSFO (Financial Sector Fuck Off) in the early 1980s.

As in the 1970s, Manx economic and social prosperity is again reliant on one, troublingly fickle, economic sector. This time, it is asset management and offshore investment, rather than deck chairs and ice cream. Severing tax avoidance loopholes must, therefore, proceed gradually so as to protect the Isle of Man from a capital flight cliff-edge. The outcome would be a 1970s scenario of unemployment, emigration and social deprivation.

International wealth flows like water, settling in the jurisdiction where the tax regimes are most advantageous. A knee-jerk clampdown would spook investors and inflict severe economic damage on British Crown Dependencies – most of which lack alternative income streams. We need to instil a moral conscience among the super rich and demonstrate that their taxed wealth provides societal good. Their money – be it offshore, onshore, or in outer space – should be subject to the same tax regime as the rest of us.

Moral pressure and gradual legislative reform can achieve this. But don’t proceed in a way which could strip the Manx working class of their livelihoods overnight and for the second time in living memory.

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