In Defense of Tax Havens?

August 28th, 2009

Any worthwhile point of view will always be met with opposition.  The stance against tax havens is no exception.  In that spirit, I think this is as good of time as any to present some arguments for tax havens.   But, since this is my blog and I do what I want, I’m also going to take some time to refute these arguments.  Discussion on the topic and “devil’s advocates” opinions are always welcome.

There are four prevalent myths about tax havens.

Myth 1: Forcing American companies out of tax havens will hinder their ability to compete globally.

False.  And this argument is ridiculous.  Essentially they are saying, “Yes, this is the law, but we should allow our companies to break it because everyone else is doing it.”

As Raymond Baker pointed out in a recent testimony on Capitol Hill, the same argument was made in the 1970s about U.S. corporations and bribes; those against legislation that would make it illegal for U.S. corporations to pay bribes to corrupt foreign officials argued the law would hurt U.S. competitive advantage.  The law was passed, U.S. corporations competed just as effectively, and the U.S. gained some serious international street cred.  In the years that followed, every major industrial country eventually passed a similar law.

Second, there isn’t compelling evidence that making these companies play by the rules would hurt them in the first place.  As I showed in a recent blog (see The Usual Suspects) about U.S. Corporations and tax havens, FedEx has 101 foreign subsidiaries, including 21 in tax havens.  The United Parcel Service, its main competitor, has no subsidiaries in tax havens and, actually, no foreign subsidiaries at all.  Last I checked UPS was competing pretty effectively against FedEx.

Myth 2: Tax havens keep taxes in developed countries lower through competition

False.  This is probably tax haven proponents’ most prized argument.  That’s sad, because it’s a complete fantasy.

First, governments should not be in the business of “competing” with tax havens for the lowest common denominator.  Legislators need to set fiscal policy (expenditures including military, health, and education) based on their tax revenue and the needs of their people.  Governments should be held accountable by their people, not held hostage by tax havens.

Second, competition with tax havens is a fundamentally unfair game.  These small countries often have tiny populations, so their governments do not need much tax revenue as they do not have many expenditures.  Governments of larger countries–like the US and UK–have vast populations, and therefore require large expenditures on public goods like a military, numerous schools, and a huge public transportation infrastructure.

Third, there isn’t a scrap of compelling evidence that “tax competition” between industrial countries and tax havens even happens at all.  What a grossly oversimplified view of macroeconomics.

Myth 3: Eradicating tax havens might ultimately hurt the U.S. because it is just as guilty as the others

True (finally)!  It could hurt the U.S.  It will also help the U.S. This was the topic of my last blog post (see Wicked).  I am not arguing we should persecute tax havens like Liechtenstein and ignore our own complicity.  In fact, as I argued, U.S. corporations are evading taxes right in their own boarders and this ultimately hurts honest taxpayers and middle class citizens.

At GFI, we advocate a level playing field.  The U.S. will win and lose if there is an eradication of tax havens.  Developing countries will also win and lose, though their gain will be much greater than their loss, since tax havens are a major destination of illicit financial flows (see 10 times ODA, but what is that in Apple Pies?).

Myth 4: There is a moral case for tax havens as they protect people in developing countries who are subject to religious, ethnic, sexual, political, or racial persecution (for example Jewish people during World War II used Swiss banks to hide assets from the Nazis)

True, but only partially.  This is the most reasonable argument, because it does actually happen.  But it does not even come close to justifying the 11 trillion dollar industry of offshore banking, which also encourages massive tax evasion and other morally reprehensible behavior, like money laundering, terrorism, drug trade, weapons dealing, sex trafficking, and other international crimes.

Also (what the proponents of banking secrecy will never tell you) is that Swiss banking secrecy also aided the Nazis. During the war, the Nazis stole gold, jewelry, and other valuables from the millions of Jews they murdered.  When they needed a way to place these commodities in the international market, they opened Swiss bank accounts.

In my opinion, the back and forth on tax havens is not as interesting as other debates in Economics, because the arguments for tax havens are rife with vested interests and generally lack sound economic theory behind them.  Nonetheless, it is important to present these arguments (and then refute them) because ignoring these paranoid cries will not make them go away.

For another lively debate on the topic, take a look at Richard Murphy’s blog “Thank Heaven for Little Tax Havens.” The string of comments below the post is particularly enlightening.

Written by Ann Hollingshead

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