Freedom In The Gulf

By Global Tax Weekly

There is a welcome announcement that an international pro-FTZ organization will set itself up in low-tax Dubai. As any regular reader of this column will know, Free Trade Zones (or their equivalents) are a Good Thing, while governments that exclude or limit them are a Bad Thing. It’s not immediately clear whether the new organization has support from the great and good of the world economic order, or whether it has any kind of reasonable financial footing; but it is welcome nonetheless, and Dubai, which is already home to a large collection of free trade zones, gets a large bouquet for supporting it. At the risk of becoming boring (just move on) let me rehearse some of the reasons why most governments dislike and discourage free trade zones, if they don’t ban them outright like the dinosaur European Union. We could classify the opposition to free trade zones into three groups: the doctrinaire; the simplistic; and the corrupt.

The EU provides an example of doctrinaire opposition. It doesn’t believe in competition, period. Since all human interaction is based on the principle of competition, and free trade zones at their most basic exist in order to give a competitive advantage to certain types of activity or certain locations, there is really nothing more to be said. Actually the EU goes quite far in the opposite direction, by subsidizing uncompetitive activities and locations, which is the very negation of constructive economic activity. Well, we will leave it to moulder.

Simplistic opposition to free trade zones is a case of not seeing the wood for the trees. Most often, it is displayed by finance ministries which cannot tolerate the “loss” of tax revenue consequent upon giving free trade zone companies corporation tax holidays. This loss, which does exist, is usually very minor by comparison with the extra tax revenues generated by increased employment: one worker earning say USD50,000 per annum generates at least USD20,000 in additional payroll and associated revenues for the government, plus the saved cost of supporting him on the dole, while the profit he generates for his employer is small in comparison and the tax lost on it is a tiny fraction of the payroll revenues that are gained. But the bone-heads in the treasury see only the “lost” tax. For them, the new job created is in replacement for a job lost “outside” the free trade zone. Competition, again, provides the answer: the existing job was going to be lost anyway, if it had not already been lost, whereas the new job is a net gain. The poor saps can’t see it.

Corrupt opposition can be dismissed almost as easily as the doctrinaire. Most governments in the world are corrupt to a greater or lesser degree, and most of this corruption depends on income flows which can be diverted to abusive purposes. Some of this income comes from international assistance programs (more poor saps) and some from out-and-out bribery, but most of it comes from tax revenues. A minister who is raking off 15 percent from corporation tax revenues from mineral processing in an un-named third-world country (not very greedy by prevailing international standards) is going to be very opposed to a free zone in which processing plants have 10-year tax holidays.

So the wonder is that there are any free trade zones at all. I hope the new organization knows what it has bitten off, and doesn’t find its own bits and pieces missing in the morning.

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