Anguilla is a small society in the Caribbean with a successful tourism economy. The growth-oriented tax system is based on consumption, not income, and rewards productive behavior. Anguilla has a government, so it has taxes, but it doesn't have a sales tax, VAT, GST, income tax, profits tax, capital gains tax, or inheritance tax.

Those who use the services, pay the taxes on them. When you buy something that is imported into Anguilla, and most things are imported, the price includes import duties. Duties are a type of consumption tax, like a sales tax. Anguilla collects about 25% duty at the border on most items (actually 5% on food and computers to 30% on beer and cigarettes). Import duties go into the general island revenues which are used to pay for things like medical services and education, which are quite good by the standards of the developing world.

In many countries, there is also a universal "Value Added Tax" that applies to every sale of goods or services in the economy. VAT turns each electrician and gardener into either an unpaid government bookkeeper/tax collector, or into a tax cheat in the underground economy. Currently, there is a 7% GST in Canada and 10%-40% VAT in Europe, and it is imposed in addition to heavy income taxes. Anguilla does not currently have a VAT.

The system for raising revenues in Anguilla is relatively eco-friendly in that the consumption of non-renewable resources is taxed fairly heavily. Those who use the roads pay a heavy annual vehicle licencing fee, and an annual driving license fee. Those who consume gasoline pay the import duty on gasoline, and those who buy cars pay a a heavy import tax for them.

Taxes in Anguilla are on consumption, not productivity. When you buy land, you pay a 5% stamp tax, 17.5% if you are not a "belonger" (local citizen). Those who use the airport pay a $10 departure tax and those who use the less expensive ferry service pay a lesser tax, only $2. There is an 8% tax on hotel rooms, but a night at Lloyds Guest House for $65 per night only collects $5 tax, while staying in an $800 suite at Cap Juluca adds $64 to the bill. (All figures on are in US dollars.)

Instead of deducting half of family income from paychecks for income taxes, surcharges, and social security taxes, Anguilla collects only a 5% social security tax (plus 5% from the employer, and the maximum is $186/month combined).

There are no taxes on savings and investment. This encourages people to save and invest. Many Anguillians, even those with very modest incomes, really know how to save.

Instead of punishing those who build a successful business by taxing away half their capital gains when they sell, Anguilla rewards hard work, boosts savings, and encourages growth of the economy. The result? The country has gone from poverty to regional prosperity in one generation.

And there is no inheritance tax in Anguilla. Family land is the most important thing in Anguilla and inheritance tax that had to be paid in cash would eliminate passing down land to your children.

Anguilla employs both the US dollar and the EC dollar (worth 37 cents) in local commerce, without exchange controls. By having the most rational currency regulations in the OECS (Organization of Eastern Caribbean States), Anguilla has more foreign currency deposits than any other OECS state. Banks use the normal "know your customer" rules to avoid money laundering.

Compared to many countries, the USA is considered tax efficient and it uses that to attract foreigners. Many creative and productive Europeans, Asians and Latin Americans make personal choices to create their businesses in Silicon Valley or Miami instead of Paris or Berlin ("Go West, Young Frenchman", Business Week, March 9, 1998: "A torrent of talent is leaving France"). Even more foreigners use the excellent financial services of the United States and the Internet makes this easier still. From Anguilla you can open an account at a discount brokers in the USA, and have full financial services over the Internet, all provided by a US firm. Or if you open an account at Dollarbank while visiting the USA, you can do all your banking over the Internet. If it is okay for the USA to use it's low tax rates to attract most of the brain power of the world, why does it call what Anguilla does "harmful tax competition".

You can think of Anguilla as a laboratory experiment in alternative tax policies. Tax policy in Anguilla isn't perfect, but it works. Anguilla, along with Hong Kong, New Zealand, and Chile, have shown that small places can prosper despite serious handicaps. In the 30 years since Anguilla separated from St.Kitts/Nevis, Anguilla's people have built a successful, productive economy, and now attract guest workers from neighboring islands. And these other islands have tax systems of the European/US model that sap the growth of new small business and protect the large, entrenched firm with its lobbyists and tax specialists.

The Numbers Tell the Story: Economic Freedom Spurs Growth: "Chile, Portugal, Pakistan, and Mauritius, the four less-developed countries that became significantly freer, grew much more rapidly than the four less-developed nations--Honduras, Iran, Nicaragua, and Venezuela--that greatly raised government involvement. ... These new estimates provide persuasive evidence that economic freedom is essential for economic growth. Countries suffer unnecessarily because their energies and imagination are not allowed to flower in a free environment." Nobel-winner Gary Becker. Another interesting article on the same topic from Cato Institute.

Revolution in a Small Country: "New Zealand's Revolution -- and that's what people there call it -- turned the country around. The income tax rate was cut from 66% to 33%, inheritance taxes were abolished, and import duties (very important in a country that has to import almost all manufactured goods) slashed. Subsidies were eliminated. Huge government enterprises that lost millions of dollars every year were sold off to private owners. Regulations were eliminated, and competition was allowed in areas where competition had never been known." Liberty Magazine. If this link breaks, go to their main web page and find the March 1997 issue.

Chile's Success Story:"Previously, the employer/employee wage tax in Chile was 60-70 percent of wages? obviously a major taxation. This was reduced to 20 percent. In changing the tax structure, corporate tax was reduced. So corporations could save, and the money was not taxed if it was invested rather than spent." James M. Buchanan Institute. [Sep99. Sorry, link is dead.]

Flat Tax Alternatives: "Hong Kong's celebrated flat tax system is really a 15 percent alternative maximum tax. The vast majority of Hong Kong residents opt voluntarily to short-circuit the complexities of the normal tax system and pay the simple flat tax instead." Cato Institute.

How To Think About Taxes: "The family first pays taxes on their own income (perhaps their wages). That is tax one. They save some of that after-tax income in the form of corporate equities. But the corporation pays corporate taxes (on behalf of the family as a shareholder). That is a second tax. Then the family pays taxes again when it receives dividends or capital gains ... That is a third tax on the saving. If the family is fortunate enough to accumulate, even at a few thousand dollars a year compounded over a lifetime, enough to leave a taxable estate, the saving is taxed a fourth time." Michael Boskin, Hoover Institute. Chairman of the Presidents Council of Economic Advisers (CEA) from 1989 to 1993.

The Hidden Burden of Taxation: How the Government Reduces Take-Home Pay. "One of the most confounding economic trends in the United States during the past 20 years has been the relative stagnation of workers' real wages. One of the primary reasons for flat wages is that taxes and other government mandates on employers have been expanding steadily, crowding out worker take-home pay." Cato Institute.

How Excessive Government Killed Ancient Rome: "The fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues because wealthier taxpayers could evade such taxes while the middle class--and its taxpaying capacity--were exterminated." Cato Institute.

The ABCs of the Capital Gains Tax "The capital gains tax is so economically inefficient--because of its punitive effect on entrepreneurship, thrift, and investment--that the optimal economic policy for the United States would be to abolish the tax entirely. ... 'You're looking at a poor man who thinks the capital gains tax cut is the best thing that could happen to this country, because that's when the work will come back. People say capital gains are for the rich, but I've never been hired by a poor man.' --New Jersey painting contractor." Cato Institute.

Tax Rates, Tax Revenues and Economic Growth: "In the presence of high tax rates, people increasingly conduct their economic activities in the 'underground,' 'black market' or 'informal' sector of the economy - where they escape official scrutiny and costly government regulations as well as high taxes.... The worst possible tax system is one which imposes very high marginal tax rates and collects very little revenue. The high marginal tax rates wreak havoc on the private sector economy, and if tax collections are low government gets very little benefit in return for the harm it causes." National Center for Policy Analysis

National Sales Tax: The Economic and Civil Liberties Case For Replacing US Income Tax. "There are two points of general bipartisan agreement on the defects of the U.S. tax code. First, the U.S. tax system reduces economic growth through punitive tax rates on savings and investment. Second, the needless complexity of the tax code imposes large costs on American businesses and workers." Cato Institute

Creating The Zero-Tax State: Why Oregon should replace taxes with user fees. "The shift from coercive taxation to voluntary user fees would place Oregonians back in control of their own spending, and force government and private service providers to improve the quality and cost-effectiveness of their services." Cascade Policy Institute.

Flat Tax or Sales Tax? A Win-Win Choice for America: "The tax laws undermine the country's prosperity by imposing needlessly harsh penalties on work, savings, and investment. Although many taxpayers face confiscatory tax rates and often are forced to pay more than one layer of tax on their income, the politically well-connected can take advantage of special deductions, credits, preferences, shelters, and loopholes to minimize their own tax liability. The result of this double standard is a tax system that not only penalizes productive behavior, but also violates the fundamental constitutional principle of equal treatment under the law." Heritage Foundation.

The Broken Window Fallacy: "A young hoodlum heaves a brick through the window of a baker's shop. ... the misfortune has its bright side. It will make business for some glazier... The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so on ad infinitum. ... the little hoodlum who threw the brick, far from being a public menace, was a public benefactor." An excerpt from the classic little book, Economics In One Lesson by Henry Hazlitt.