The Cayman Islands is an important jurisdiction for you to consider in your international diversification game plan. While there are a number of low-tax countries around the world, Cayman sticks out because of its distinct history and culture that is vehemently opposed to direct taxation. I believe this is a good guarantor for preserving these policies into the future, something that other low-tax countries might lack.
To discuss further I turned to International Man contributor Jeff Thomas. Jeff is a Caymanian with a deep knowledge of the Islands. I am happy to bring you this interview with Jeff, to get his expert opinion.
Nick Giambruno: The Cayman Islands is known for being the world's fifth-largest banking center. It's a highly sophisticated jurisdiction, yet, unlike most banking centers, Cayman seems to reject the idea of an overarching government that calls all the shots.
Jeff Thomas: That's true. Actually, Cayman is quite libertarian, but not as the term seems to be commonly perceived in the US. We're more attuned to the classical definition of Liberty—that a man should have the freedom to live his life as he sees fit, as long as he respects the equal rights of others. The average Caymanian wouldn't describe himself as a libertarian; he simply has a deep commitment to traditional values. And it's not something he goes around thumping his chest over. It's a quietly held belief that comes from the very centre of his upbringing.
Nick: How do those traditional beliefs impact the modern world of the financial industry?
Jeff: In a very positive way, I believe. Caymanians hold on to the traditional concept of privacy. The governments of much of the world have done a good job of perverting the definition of privacy by equating it with secrecy. Traditionally, secrecy tended to mean that there was something you were doing that wasn't quite right, so you wanted to hide it from others. Privacy, on the other hand, was something that people are inherently entitled to. Unless you were causing injury to others or their property, your affairs were no one else's business. Although many governments have succeeded in convincing their people that any desire for privacy signifies that they have done something criminal, Caymanians recognise that secrecy and privacy are two different things and can take umbrage if their privacy is infringed.
Nick: Can you give an example?
Jeff: Well maybe a good example would be our government statistics department. Years ago, as we were becoming more developed, the government of the day created a statistics department, to define how many Caymanians we had, how many non-Caymanians—that sort of thing. So they sent out a massive survey that asked a plethora of questions. Most people answered the questions politely until they came to things like, "What were your total earnings in the past year?" The great majority simply left it blank, although some Caymanians wrote in, "None of your damn business."
When the government got the returns, they said, "But it's a government survey. You have to fill it in properly or you'll be breaking the law." I recall that someone wrote into the local newspaper that a very large prison would be needed, as he and 90% of all Caymanians would be going there, because there was no way we would provide such information to any government, however well-intended. His view was the consensus. People dug in their heels. The government of the day realised that if they pushed the issue, they'd not be re-elected, and they backed off.
It's essential that you stand up now and again and restate basic rights. If not, government—any government—will be inclined to assume there are no boundaries to what they can require of the citizenry.
Nick: Do you think that can be done in larger countries?
Jeff: Not so easily, no. The larger the country, the harder it is to keep a government from growing ever larger, ever more powerful. The system needs to remain personal in some way. Here in Cayman, we live in the same neighbourhoods with our legislators. We can go to their offices and talk to them. We can go to their favourite watering holes and give them a piece of our mind if we see fit… and still share a pint with them afterward.
It also helps that what our legislators do is more visible in Cayman than in larger countries. From time to time, they'll get carried away, starting to live the high life at the public expense. Caymanians tend to be very polite, very tolerant. But at some point, that courtesy reaches its limit when things go a bit too far. Then, legislators' abuses become a major national issue. We had a bout of that a year or so ago. The abuses have gone into remission, and the present government is being much more responsible.
Nick: So, you think that the fact that the country is small tends to keep a lid on political abuse.
Jeff: That, and the fact that we don't really have a political class, per se. Until around 1970, we were an economic backwater. People who ran for office did so largely to help the country. There certainly wasn't much money or power in it. But, over the last forty years or so, that's changed. There's now quite a bit of money and power for those in public office. Consequently, our political leaders may sometimes become puffed up with their self-importance.
Caymanians have a very low tolerance for arrogance. Whenever a legislator oversteps himself and seeks to be on a higher plane than the people he represents, his days are generally numbered. He's sent packing in the next election.
Historically, we gave a government two terms—eight years, but in the last few elections, that's changed. One term and they are already puffing up, so out they go. That may have changed in the last election, in 2013. There was a decided effort by those who were elected to show greater humility and this bodes well for the future.
Nick: In my view, that's why Cayman is different from other low-tax jurisdictions. You have a culture and history that helps to guarantee that positive policies won't be reversed in the future.
Jeff: I think it's true that all countries have a shelf-life of sorts. They start off with very little, but through industriousness, they prosper. Eventually they reach the point where their political leaders begin promising something for nothing to those of lower income. Since those folks are in the majority, they vote for the candidates who promise largesse to them. Then the country begins its decline, as, increasingly, more is taken out of the hands that initiate the prosperity, and given to others, always with an ever-larger chunk going to the government itself.
It could be argued that Cayman will also go through this process eventually. The good news is that we're very much in the early, productive stages of development. The country has a good, long run ahead of it.
Nick: It seems to be true the world over that politicians seek to increase their power and to create taxes, or increase taxes, at every opportunity. Are Cayman's politicians somehow more enlightened, or are they kept in check by the public?
Jeff: The latter. The pushback from the public is so great that they respond. For example, in 2012, our then-premiere suggested a tax for foreign workers. Now, he himself has no particular prejudice against foreign workers; he just wanted more money to play with. He considered the tax a good excuse to get the money. He called it a "Community Enhancement Fee."
There was an immediate outcry from both expatriates and locals, that it was not only prejudicial, but could damage the islands' status as one of the leading offshore financial centres. After two weeks of campaigning by residents, the premiere announced that the tax was off the table.
Nick: And will there be permanence to a success like that, or is it an ongoing battle?
Jeff: It's ongoing. I see it this way: The Swiss don't have a standing army. Every man between the ages of twenty and fifty is expected to be ready for service at any time. He keeps his weapon and uniform at home, ready to go if there is an emergency. I believe that citizens of any country need to do essentially the same with regard to political issues: be prepared to interrupt their daily work and keep the legislature in check.
I think that the founding fathers of the US had a good idea with the checks and balances concept, but they got it wrong when they decided that one part of the legislature could be a check and balance on the other part of the legislature. That was quite naïve, I'm afraid.
The citizenry must be prepared to take on the mantle of opposition at any time. It has to be that way, because it's the only method that actually works. And if the individual does take on that civic responsibility, you're more inclined to get good people to be willing to run for office, not merely the carpetbaggers.
Nick: Cayman has a history of being in vehement opposition to direct taxation. It seems to me that this sort of attitude and culture is the best guarantor against future confiscatory taxation policies. The culture and attitude of a jurisdiction's people is an important, but often overlooked, aspect in my opinion.
Jeff: Yes, that's true. We got lucky there. Ages ago, we were of so little consequence that the king declared us free from conscription and taxes. The idea became ingrained and, today, the very idea of any form of direct taxation is looked upon by Caymanians as an abomination. Taxation, after all, is no more than legalised theft. If the citizens of any country had to vote on every tax in order for it to be ratified, oppressive tax levels would be a rarity.
Nick: Do you suppose it's the same in other low-tax or no-tax jurisdictions? Is the average Singaporean as vehemently opposed to taxation as the average Caymanian? I doubt it. What does that say about the future potential for creeping increases in government power in these two countries?
Jeff: That's quite a good question. I can't speak for the mindset of the average Singaporean. But Singapore, like Cayman, is a small place, where an inordinate percentage of the people are involved in international finance. This means that the majority have a stake in the industry being eroded by either internal or external forces. So, you have a better chance that they'll elect leaders that support the industry. If, however, for the sake of argument, you had a country where 90% of the people were in the auto workers' union, you could be sure that they would elect leaders who would promise unachievable socialistic ideals.
That said, Cayman does demonstrate a rather unique level of public-spiritedness regarding overreach of government in any form. We may be unique in that regard.
Nick: You mentioned that in 1970, the financial industry was in its infancy, yet by the late '90s, Cayman had become a world financial leader. In most countries, that means that the locals get left behind and tension builds as the haves and have-nots diverge. Do you perceive an undercurrent that may cause damage in the future?
Jeff: No, I don't. First, Caymanians, by nature, are extraordinarily tolerant of others and have extended remarkable latitude to expatriates who have come to work. (And believe me: whilst most expatriates here have been good citizens, there have been some who have taxed Caymanians' good nature.)
Second, back when the financial industry was created, we had virtually no finance laws. We were a clean slate. We had one or two visionaries who created the legislation for the industry. It was meant to be both simple and sensible. As a result, what they created has stood the test of time.
An important part of the legislation was that any new business would have to have substantial Caymanian ownership. If an offshore investor wanted to start up a company, he would need to take on a Caymanian partner. That partner may have been only a fisherman, or a construction worker, but as the company grew, so did his business acumen and his financial success. He might have had a limited education, but he would eventually have been able to send his children to university as a result of his success.
Now, two generations later, it's the norm for a Caymanian in the financial industry to be well educated and clearly be the equal of his expatriate counterpart.
This is essential to the continuation of success in any country. The opportunity must be there for all residents, regardless of nationality, to succeed if they make the effort. This is the glue that holds everyone together. In Cayman, it's always been a joint effort between Caymanian and expat, and that's now more true than ever. It's an overall partnership. We all need each other if we're to do well.
Nick: Jeff, thank you for your time.
Jeff: My pleasure.
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