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CF&P Foundation Prosperitas

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May 2007, Vol. VII, Issue IV

Tax Havens: Myth Versus Reality

So-called tax havens are routinely vilified, largely because they are perceived as a threat by politicians, leftist organizations, and other advocates of bigger government and high tax rates. In almost all cases, however, attacks on these low-tax jurisdictions are either baseless or distorted.

Surprisingly, anti-tax haven demagogues generally are unable to even correctly identify the characteristics that make a jurisdiction a "haven." Is it low taxes? Zero taxes? Financial privacy laws? Incorporation laws that do not require ownership information? The existence of bearer shares? And even the critics that use a more carefully tailored definition – i.e., a jurisdiction that exercises its sovereign right to not enforce the tax laws of another nation – often engage in discrimination when listing the world's tax havens.

The United States, for instance, is a tax haven. Foreigners can – and do – put money in the U.S. and earn interest and capital gains without any obligation to pay tax to the IRS and without being reported to their governments. Many states allow foreigners to set up corporations without disclosing ownership information. Some even allow bearer shares. These policies have helped attract trillions of dollars to the U.S. economy, yet critics of tax havens fail – perhaps deliberately – to note how any campaign against tax havens unambiguously can boomerang against America's self interest.

Critics also ignore how tax havens provide confidentiality to ethnic, religious, racial, sexual, and political minorities, a critical role since the majority of the world's population lives in nations have less-than-stellar attitudes toward human rights. Likewise, tax havens also are a refuge for people in nations suffering from crime, extortion, and corruption.

Tax haven opponents routinely rely on shoddy numbers, ignore academic evidence, and engage in smear campaigns. Public policy, however, should not be based in mistruths and stereotypes fostered in novels and movies. And public policy certainly should not be based on politicians in high-tax nations persecuting nations trying to prop up their inefficient welfare states by engaging in anti-globalization policies.

By Daniel J. Mitchell, Ph.D.

While there are alternative definitions, a tax haven is probably best defined as a jurisdiction that meets at least two criteria: First, it will have at least some tax and/or regulatory policies that are market-friendly and those policies will be perceived to attract economic activity from other jurisdictions. Second, it chooses, in at least some cases and within its right as a sovereign entity, not to help foreign governments tax economic activity inside its borders. 

So-called tax havens now are being persecuted. Politicians in high-tax nations resent these jurisdictions because globalization has made it much more difficult to impose confiscatory tax rates. Indeed, tax rates have dropped dramatically since 1980, in part because havens have facilitated greater tax competition among nations. To fight against the liberalizing impact of globalization, politicians from high-tax nations have are working through international bureaucracies such as the Organization for Economic Cooperation and Development in a campaign against tax competition.

In other cases, politicians in national capitals are advocating legislation that would penalize tax havens even though the policies often are self-destructive, based on discriminatory blacklists, and completely incompatible with international trade agreements. In all cases, the anti-tax haven efforts are based on an oftentimes-deliberate misunderstanding of the issues.

The following section addresses some of the myths being propagated by opponents of low-tax jurisdictions. Each point is then briefly discussed and one or more links are provided for those seeking background information:

1) There is not a significant "offshore evasion" problem. According to IRS tax gap estimates, there is no number for "offshore." To be sure, there doubtlessly is some evasion, and it probably is assumed in one or more of the other categories in the IRS estimates, but the supposed problem is relatively trivial. A former Democratic staffer named Jack Blum concocted an estimate of $70 billion. When former House Majority Leader Dick Armey asked CRS to get the methodology for the number, Blum confessed, for all intents and purposes, that he made it up.

 

2) Financial privacy plays a key role in protecting human rights. A huge share of the world's population does not live in civilized nations that respect the rule of law and property rights. Most people are subject to discrimination if they are religious, ethnic, racial, political, or sexual minorities. Others are victimized by corruption, expropriation, or crime. Tax havens provide a refuge to people who need protection. Even the OECD's Jeffrey Owens admitted that "tax havens are essential for individuals who live in unstable regimes." President Clinton's former International tax Counsel acknowledged "the problems of corrupt governments, or danger to your children and to individuals."

    December 2005, The Liberal Institute of the Friedrich Naumann Foundation, by Daniel J. Mitchell, The Moral Case for Tax Havens
    http://admin.fnst.org/uploads/1044/24-OP-pdf.pdf

    October 2, 2003, Cato Policy Analysis No. 491, "Threats to Financial Privacy and Tax Competition," by Richard W. Rahn and Veronique de Rugy
    http://www.cato.org/pubs/pas/pa-491es.html

    November 2001, CF&P Papers, By Terence Dwyer & Deborah Dwyer, Transparency Versus Privacy:  Reflections On OECD Concepts of Unfair Tax Competition
    http://www.freedomandprosperity.org/Papers/Dwyer/dwyer.shtml

 

3) OECD hypocrisy. Many nations belonging to the OECD are tax havens according to the definition concocted by the Paris-based bureaucracy. Moreover, a just-released IMF study identified the UK as a tax haven. Austria, Belgium, and the Netherlands also are tax havens since they have bank secrecy and/or other provisions that make them a magnet for financial capital. And, as discussed below, the United States is perhaps the world's foremost tax haven. In an exercise of gross hypocrisy, the OECD does not blacklist its own member nations.

 

4) The US benefits from tax competition. Whether it is because foreigners don't pay tax on US-source interest and capital gains, or whether it is because Delaware, Nevada, and Florida companies are among the world's best offshore vehicles, favorable rules for non-resident aliens have attracted trillions of dollars of foreign capital to the US economy. In other words, the US is a tax haven according to the OECD's definition. America should not have to surrender its fiscal sovereignty and give away its competitive position in the way that the left seeks for other "offshore" jurisdictions. This would destroy jobs and weaken financial markets as money flees the US economy.

 

5) International bureaucracies have no moral authority to interfere with national tax laws. The OECD was just exposed in The Economist for corruption. A few years ago, the Paris-based bureaucracy was exposed for its lack of transparency and failure to follow proper accounting. The bureaucrats at the OECD get tax-free salaries, and taxpayer-financed pensions that would make a member of Congress blush (not to mention that the OECD even has its own wine cellar).  It surely is ironic that people completely insulated from taxation are persecuting nations for free-market tax systems.

 

6) Fiscal sovereignty is at stake. Ultimately, the issue is whether any international bureaucracy should have a veto right over any jurisdiction's tax policy, including America's. The OECD has self-appointed itself as a global standard setter, but this anti-democratic action is especially dangerous because the OECD's views are contrary to good tax policy. The OECD is not the only bureaucracy seeking to curtail tax competition. The United Nations also is involved. It seeks the creation of an International Tax Organization (UN bureaucrats also get tax-free salaries).

 

7) We should mimic tax havens, not persecute them. Academics have found that tax havens increase growth in non-tax haven jurisdictions. Academics have found that tax havens score better on global governance indicators. Academics have found that tax havens enjoy faster growth than other nations..

 

8) The problem is high tax rates. Experts, including those at the IMF, have discovered that tax evasion unambiguously is a function of tax rates. When tax rates are high, taxpayers find ways to avoid and evade. Jurisdictions that have good tax law should not be held responsible when politicians in other nations impose bad tax policy and cause capital flight.

 

9) The OECD tax agenda is completely inconsistent with tax reform. The OECD seeks to help governments double-tax income that is saved and invested, and to help them enforce this bad tax law on an extra-territorial basis. This means that the OECD, for all intents and purposes, feels compelled to target and penalize jurisdictions that have tax systems (such as the flat tax or the sales tax) that tax income only one time and only tax income inside national borders. This is both because pro-growth tax systems attract jobs and capital from nations with bad tax law and because nations with good law have no reason to collect the information that high-tax nations need to track - and tax - flight capital. If the OECD and other international bureaucracies succeed in becoming self-appointed global tax police, this will at the very least complicate the fight for fundamental tax reform.

 

10) Tax competition should be celebrated, not persecuted. Tax havens play a vital role in constraining the greed of politicians. So-called tax havens have helped encourage high tax nations to reduce personal income tax rates (by about 25 percentage points since 1980) and corporate income tax rates (by about 20 percentage points since 1980). These tax rate reductions, often adopted with great reluctance by politicians in OECD nations, help explain why the global economy is performing so much better than it did in the 1960s and 1970s when tax rates were much more punitive.

 

11) So-called tax havens are less likely to engage in money laundering according to international experts and U.S. government agencies. Dirty money generally is laundered where it is obtained, and criminals avoid taking it offshore since that creates a trail for investigators. Tax havens also fully participate in the war against terror and cooperate in the fight against those who violate the commonly shared laws of civilized nations.

______________________________

About the Author:  Daniel J. Mitchell is a Senior Fellow at the Cato Institute (www.cato.org).

 

Additional Issues of Prosperitas:

23) April 2007, Vol. VII, Issue III, "The Economic Case for Limited Government," by Sven R Larson. Web page link below:
http://www.freedomandprosperity.org/Papers/rahncurve/rahncurve.shtml

22) March 2007, Vol. VII, Issue II, „The Hong Kong Tax System -- Key Features and Lessons for Policy Makers,"  by Professor Michael Littlewood. Web page link below:
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.shtml

21) February 2007, Vol. VII, Issue I, "The Swiss Tax System: Key Features and Lessons for Policy Makers," by Pierre Bessard. Web page link below:
http://www.freedomandprosperity.org/Papers/swiss/swiss.shtml

20) September 2006, Vol. VI, Issue VI, "The Slovakian Tax System: Key Features and Lessons for Policy Makers," by Martin Chren, Web page link below:
http://www.freedomandprosperity.org/Papers/slovakia/slovakia.shtml

19) June 2006, Vol. VI, Issue V, "Making Section 911 Universal is Good Economic Policy and Good Tax Policy, " by Yesim Yilmaz, Web page link below:
http://www.freedomandprosperity.org/Papers/sec911-2006/sec911-2006.shtml

18) June 2006, Prosperitas Volume VI, Issue IV, "The Health Care Choice Act: Restoring Competition in the Individual Insurance Market," by Sven Larson, Web page link below:
http://www.freedomandprosperity.org/Papers/hc-choice/hc-choice.shtml

17) June 2006, Prosperitas Volume VI, Issue III, "Tax Havens, Tax Competition and Economic Performance," by Yesim Yilmaz, Web page link below:
http://www.freedomandprosperity.org/Papers/taxhavens/taxhavens.shtml

16) June 2006, Prosperitas Volume VI, Issue II, "The Swedish Tax System -- Key Features and Lessons for Policy Makers," by Sven Larson, Web page link below:
http://www.freedomandprosperity.org/Papers/sweden/sweden.shtml

15) January 2006, Prosperitas Volume VI, Issue I, "The Paris-Based Organization for Economic Cooperation and Development: Pushing Anti-U.S. Policies with American Tax Dollars," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/oecd-funding/oecd-funding.shtml

14) November 2005, Prosperitas Volume V, Issue II, "The OECD's Anti-Tax Competition Campaign: An Update on the Paris-Based Bureaucracy's Hypocritical Effort to Prop Up Big Government," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/oecd-hypocrisy/oecd-hypocrisy.shtml

13) May 2005, Prosperitas Volume V, Issue I, "Territorial Taxation for Overseas Americans: Section 911 Should Be Unlimited, Not Curtailed," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/section911/section911.shtml

12) August 2004, Prosperitas Volume IV, Issue II, "The Threat to Global Shipping from Unions and High-Tax Politicians: Restrictions on Open Registries Would Increase Consumer Prices and Boost Cost of Government," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/shipping/shipping.shtml

11) June 2004, Prosperitas Volume IV, Issue I, "The OECD's Dishonest Campaign Against Tax Competition: A Regress Report," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/oecd-dishonest/oecd-dishonest.shtml

10) October 2003, Prosperitas Volume III, Issue IV, "The Level Playing Field: Misguided and Non-Existent," by Dan Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/lpf/lpf.shtml

9) July 2003, Prosperitas Volume III, Issue III, "How the IRS Interest-Reporting Regulation Will Undermine the Fight Against Dirty Money," by Daniel J. Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/irsreg-dm/irsreg-dm.shtml

8) April 2003, Prosperitas Volume III, Issue II, "Markets, Morality, and Corporate Governance: A Look Behind the Scandals," by Daniel J. Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/corpgov/corpgov.shtml

7) February 2003, Prosperitas Volume III, Issue I, "Who Writes the Law: Congress or the IRS?," by Daniel J. Mitchell, Web page link below:
http://www.freedomandprosperity.org/Papers/irsreg/irsreg.shtml

6) April 2002, Prosperitas Volume II, Issue II, "The Case for International Tax Competition: A Caribbean Perspective," by Carlyle Rogers, Web page link below:
http://www.freedomandprosperity.org/press/p03-25-02/p03-25-02.shtml

5) January 2002, Prosperitas Vol. II, Issue I, "U.S. Government Agencies Confirm That Low-Tax Jurisdictions Are Not Money Laundering Havens," by Daniel J. Mitchell. Web page link below:
http://www.freedomandprosperity.org/Papers/blacklist/blacklist.shtml

4) November 2001, Prosperitas, Vol. I, Issue IV, "The Adverse Impact of Tax Harmonization and Information Exchange on the U.S. Economy," by Daniel J. Mitchell. Web page link below:
http://www.freedomandprosperity.org/Papers/taxharm/taxharm.shtml

3) October 2001, Prosperitas, Vol. I, Issue III, "Money Laundering Legislation Would Discourage International Cooperation in the Fight Against Crime," by Andrew F. Quinlan. Web page link below:
http://www.freedomandprosperity.org/Papers/kerry-levin/kerry-levin.shtml

2) August 2001, Prosperitas, Vol. I, Issue II, "United Nations Seeks Global Tax Authority," by Daniel J. Mitchell. Web page link below:
http://www.freedomandprosperity.org/Papers/un-report/un-report.shtml

1) August 2001, Prosperitas, Vol. I, Issue I, "Oxfam's Shoddy Attack on Low-Tax Jurisdictions," by Daniel J. Mitchell. Web page link below:
http://www.freedomandprosperity.org/Papers/oxfam/oxfam.shtml

Complete List of Prosperitas Studies, including summaries:
http://www.freedomandprosperity.org/fpf/prosperitas/prosperitas.shtml

_______________________________
Center for Freedom and Prosperity Foundation
P.O. Box 10882, Alexandria, Virginia 22310
Phone: 202-285-0244
www.freedomandprosperity.org

 

 

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