Treasure Islands - Nicholas Shaxson [25]
On the corporate side, offshore activity did not initially focus so much on tax. One great historical landmark in this respect emerged in the late nineteenth century when James B. Dill, a New York corporate lawyer, persuaded the governor of New Jersey that the state could get out-of-state corporate managements to incorporate there by passing permissive incorporation laws favorable to managers to the detriment of shareholders. New Jersey passed its first such law in 1889, then relaxed its rules again and again.10 Corporations, including the Standard Oil Trust, began to relocate out of New York and other large centers and flock to New Jersey. Britain and the Netherlands began to follow the U.S. lead.11
Just before the First World War, however, New Jersey’s governor Woodrow Wilson decided to check the rampant corporate abuses that had emerged as a result of these permissive incorporation laws and put in place progressive new antitrust laws and rules to make corporate managers more accountable to shareholders, investors, and other stakeholders. So corporations flocked to neighboring Delaware, which had already set the standard to be used by tax havens thereafter, by letting corporate managers effectively write their own corporate governance rules. By 1929 two-fifths of Delaware’s income came from corporate fees and taxes, and it led the United States in incorporations, a lead it has never lost. An article in the American Law Review in 1899 noted Delaware’s efforts to win the race to relax corporate standards and called Delaware “a little community of truck-farmers and clam-diggers . . . determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late.”
This brief digression into corporate law helps remind us what offshore is all about. It is not just about tax: In this case it is about attracting money by offering rewards to insiders, at the expense of other stakeholders, undermining or undercutting the rules and legislation of other jurisdictions.
And indeed, Delaware seems to have a long historical predilection toward offshore business: At the Constitutional Convention, Delaware’s delegation fought aggressively for each state to get the right to send two senators to Congress—putting tiny Delaware on a par with mighty New York. A Delaware delegate12 threatened that if they didn’t get their way, “the small ones would find some foreign ally of more honor and good faith, who will take them by the hand and do them justice.” It is easy to see, in light of examples like this, why offshore business is so often described as unpatriotic.
Offshore corporate tax avoidance really started taking off around the time of the First World War: Before that, taxes were mostly too low to worry about.13 When war broke out, however, a lot of countries needed to raise a lot of money fast, and income taxes rose dramatically. In the United States, the top rate of tax for individuals rose from 15 percent in 1916 to 77 percent in 1918. The nation introduced the corporate income tax only after the Sixteenth Amendment was ratified in 1913, and it rose to 12 percent in 1918, by which time corporation taxes amounted to half of all federal tax revenues. In Britain the standard rate rose fivefold