What tax havens do – 6 – they undermine democracy

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Tax havens undermine democracy. They do this through their promotion of a process called tax competition. As one of the proponents of tax competition, Richard Teather, a lecturer at Bournemouth University has said:

Tax competition acts as a check on governments’ ability to raise taxes; it ensures that governments have more limited
funds and thus provides incentives for governments to spend more wisely.

By preventing taxes becoming too high, tax competition boosts economic welfare, productive investment and
employment. Low-tax jurisdictions also make global capital markets more efficient.

There are many more quotes of this sort put out by those who support tax havens. There are a number of assumptions implicit in such statements:

  1. That it is appropriate for one government to deliberately set out to interfere in another government’s ability to raise taxes.
  2. That because a government does have a reduced capacity to raise taxation it is necessarily more efficient.
  3. That taxation reduces economic welfare and well-being.
  4. That flows of unregulated capital through tax havens without cost being incurred result in efficient financial markets.

Each of these has extremely dubious foundation. No group has protested more strongly that another state does not have the right to interfere in the setting of tax rates than the tax haven jurisdictions. By definition this undermines their argument that they can be used to influence tax rates in other nations.

If, as a matter of fact, low tax rates in tax havens are intended to reduce the capacity of other governments to tax then they are hopelessly inefficient at the task. Over the last decade or so average rates of government spending in OECD states have risen. Tax competition is a miserable failure on that score.

It is also widely known that the countries with the highest level of recognised well-being in the world are the Nordics states, where levels of taxation are high. At the same time, the countries with the lowest rates of overall taxation are to be found in Africa. It would be a brave person who argued that they have the highest levels of well-being.

As for the argument that the flows of hot money through tax havens in unregulated fashion have produced economic well-being – the current world financial crisis proves just how untrue this is, and that they contributed to that outcome.

And yet, each of these arguments ignores an even more fundamental issue. That is that tax rates, levels of spending and the allocation of reward within a society should be determined by the people of each state in free and democratic elections. If the people of a state wish to have a high rate of tax, and resulting high levels of public service, or even of income redistribution, then that is their choice. No one, especially a small group of financiers who have taken effective possession and control of the legislature of a small jurisdiction should be allowed to try to undermine that democratic process being undertaken elsewhere. Those who demand that these financiers have such power through such locations are in effect saying that the democratic process is one to which they do not subscribe.

The message is simple: tax havens are being used to undermine democracy. They are a threat to fundamental part of our way of life.