Saturday, April 11, 2009

Tax Havens - A Necessary Evil?

[IMAGE: Financial crisis / Finanzkrise, 2009, alles-schlumpf,
This is a follow-up to an earlier post about banking secrecy and tax havens. Since that post, the G20 has met, and tax havens were indeed discussed. Furthermore, the G20 announced that it intends to:

"take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems ... We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information."

Will G20 countries ever actually go so far as to deploy sanctions? I'm not sure. But some commentators have been up in arms about this threat. One chap, blogging for the conservative US Heritage Foundation, wrote:
"The attack on tax havens is, at best, a politically motivated irrelevancy. At worst, it is the start of a broader campaign to find new sources of money to tax and stigmatize as international wrongdoers states that, as an expression of their national sovereignty, have chosen to have lower taxes. These states are using their political freedom to promote economic freedom: They are benefactors, not malefactors."
But, as ever, it's not so simple. Yes, states are well within their rights to set their own tax rates and compete with other states for international investment. But does that also give them the right to assist in tax evasion? In other words, do democratic states not also have the sovereign right to collect taxes?

Leftist, Big Brother Anti-Tax Haven Bureaucrats

Bob Bauman, writing on the "Offshore Asset Protection Blog," was even more critical:

"all this G-20, leftist, Big Brother anti-tax haven pressure is a smoke screen for welfare state tax collectors aiming for complete destruction of financial and personal privacy for everyone... These tax bureaucrats demand access to every citizen's financial lives, no matter where you live or where you may have assets."
But the "banking secrecy" employed by tax havens goes above and beyond the level of privacy provided by normal high-street banks. The issue essentially boils down to cooperation with government tax authorities: regular banks cooperate with tax authorities against tax evasion; tax havens do not.

Bauman goes on:
"[the OECD] also produced a blacklist of 34 supposedly "bad" tax havens, the sole criterion for "bad" being these jurisdictions will not automatically turn over requested tax information about foreigners with bank or financial accounts in their countries.

Of course the authors of the "bad" jurisdictions list carefully excluded themselves, including the United States and the United Kingdom, two of the leading tax havens in the world."
In actual fact, the list published by the OECD is not a moral judgement. It is a statement of fact. Indeed, it's not even so much a "blacklist" as it is a progress report. It doesn't mention "good" or "bad" tax havens. It just lists the progress of various countries in implementing regulations involving the sharing of tax information. Switzerland, as it hasn't yet implemented any OECD regulations, was on the list (although it was made clear that Switzerland has announced it intends to sign up to the regulations).

The United Kingdom and the United States were, despite what Bauman writes, also included on the list. They are at the top, beneath the heading "Jurisdictions that have substantially implemented the internationally agreed tax standard." This is because they have actually signed up to most or all of the OECD regulations. Switzerland has signed up to none of them. This isn't a moral judgement. It is a statement of fact.

Nevertheless, unhappy about being included on the list, the Swiss government then vetoed part of the OECD budget. This seems a tad spiteful. The OECD was vetoed, essentially, for reporting the truth. The amount vetoed was 134,800 euros - hardly a sum of bail-out sized proportions, but the veto sends a message.

The Oil That Greases the Machine?

The law firm Allen & Overy recently published an article defending tax havens. The article describes tax havens as:
"the oil which enables many uncontroversial financial and commercial transactions to run smoothly and it would be a mistake if changes which are necessary to prevent abuse were to result in that oil being drained from the system."
Their argument is, essentially, that tax havens should continue to exist because otherwise the international economy will suffer. Tax havens allow international transactions to cheat what would otherwise be an overly clunky system:
"The tax systems of most large economies are not perfect; they are complex and inflexible and often give rise to adverse mismatches which are unexpected and unintended and which do not reflect the economics of the transaction... A tax haven entity can be used as a very efficient pass-through for unexciting but important flows of money, in situations where unnecessary or uncertain tax rules would operate to make the transaction unattractive."
This may seem like a fair point. But surely it would be better for genuine tax competition to be taking place, rather than for businesses to constantly try and cheat the system. If a government has a clunky tax system in place, then it should suffer for that economically. If there aren't any negative effects, there will be no impetus to reform the tax system. This is supposed to be how liberal competition works.

The Dark Side of Tax Havens

By painting their critics as loony lefties or as big-brother conspiracy types, supporters of tax havens are ignoring the darker side of tax evasion. The truth is that the countries suffering most from tax havens are not rich, developed countries. They are countries in the developing world. Angel Gurría, the secretary general of the OECD, wrote an article last year in which he claimed that:
"developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid."
This is a truly shocking figure. Oxfam estimates that at least six trillion dollars of developing country wealth is currently being held offshore by individuals. This figure doesn't even include money moved offshore by private companies.

Now, I've listened to the arguments from both sides on this one. I honestly can't see any valid justification for allowing tax havens to continue operating. Even on their own terms they are a failure, because they distort global tax competition. When you add to this the damage done to the developing world, the continued existence of tax havens seem

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Anonymous said...
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Josef Litobarski said...

I removed the above comment because it looked like it was left by a bot.