In Defense of Tax Havens

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It’s only fair to let your opponents have  a crack of the whip sometimes. Richard Rahn, a senior fellow at the far-right US Cato Institute, and a former board member of the Cayman Islands Monetary Authority, which regulates the world's largest offshore financial centre (an interesting association, don’t you think?) has written in the Wall Street Journal under the above title. He has said amongst a great deal else:

In addition to charges of tax evasion [levied at tax havens], some members of Congress -- echoing European politicians including France's President Nicolas Sarkozy and British Prime Minister Gordon Brown -- have even tried to scapegoat the low-tax jurisdictions as somehow being responsible for the global recession. They are demanding that the G-20 countries come up with action proposals against them at their meeting next month.

This is nonsense. The so-called tax havens are for the most part no more than way-stations to temporarily collect savings from around the world until they are invested in productive projects, such as building a new shopping center or semi-conductor plant in the U.S. This enables a better allocation of world capital, leading to higher, not lower, global growth rates.

Indeed, to the extent tax competition between jurisdictions holds down the increase in the growth of governments, citizens of all countries experience more job opportunities and higher standards of living. And to the extent that businesses and individuals are discouraged by taxes or regulations from investing outside their own jurisdictions, they may simply choose to work and save less, period.

It’s pretty extraordinary that Rahn dismisses all talk of tax evasion as if it just does not happen, and that gives some evidence of his objectivity, but the above is just plain wrong.

Tax havens – or secrecy jurisdictions – exist to provide the largest corporations and the wealthiest people in the world with opportunity to hide their wealth from regulation and tax, as the Barclays case is proving very clearly at this moment. They have no other purpose. As Rahn correctly admits – they are mere depositories.

But mere depositories cannot in this case add value – except for their clients - who secure an unfair competitive advantage over the ordinary, less wealthy, people of the world who have to pay their taxes on their income as it arises. That is most of us.

In fact it is very clear that tax havens exist to produce market imperfections. I explain why here. In that case it is impossible for them to increase the net stock of human well-being if you have any faith in market economics at all. All I can do is increase the gap between the richest and poorest and the overall sum of human well-being. That is what we actually observe. That is what Rahn does, no doubt, wants and that is precisely what those bankers, lawyers and accountants who populate these secrecy jurisdictions want for themselves and for their clients.

But Rahn moves on into even greater realms of fantasy in his next section:

Those who demand increased taxes on global capital often rail against financial privacy and bank secrecy -- forgetting they are necessary for civil society. It is true that not all people are saintly. But it is also true that not all governments are free from tyranny and corruption, and not all people are fully protected against criminal elements, even within their own governments. Without some jurisdictions in the world enforcing reasonable rights of financial privacy, those living in un-free and corrupt jurisdictions would have no place to protect their financial assets from kidnappers, extortionists, blackmailers and assorted government and nongovernment thugs.

This is blatantly absurd. Unless the person with wealth who might be subject to kidnapping, extortion or blackmail is willing to hide all their wealth from view, live in a modest abode and drive a very small car (or better still, a bicycle) then there is no hope that they will hide their wealth from those who might target them. To suggest that offshore banking secrecy prevents this human rights abuse is a simple, straightforward abuse of the human rights argument. I assure you, blackmailers, kidnappers and extortionists do not choose their targets on the basis of the financial interrogation of their net worth. They choose them because of their extravagant lifestyles, purchase of absurdly expensive cars, and the amount of bling that they wear. None of this is hidden offshore. Nor is there any evidence that has ever been produced to show that the benefit Rahn claims have ever arisen in practice.

So let us be realistic: there is no defence for tax havens unless you wish to argue that the rich must be favoured by society, that those who steal public property by undertaking tax invasion should be granted immunity, and that the democratic ordering of our governments should be undermined by the world's bankers, accountants and lawyers.

Some do think that, but I leave it to you to decide whether it is a credible basis for progress.