In Praise of Tax Havens

By Mitchell, Daniel J. | Freeman, July/August 2009 | Go to article overview

In Praise of Tax Havens


Mitchell, Daniel J., Freeman


"The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax. ... A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society."

- Adam Smith, The Wealth of Nations, 1776

In May, President Obama declared war on Americans who shelter their money in low-tax jurisdictions overseas.

Meanwhile, at the behest of politi- cians from high-tax nations, interna- tional bureaucracies are persecuting these tax havens. The Paris-based Organization for Economic Cooper- ation and Development (OECD), for instance, blacklisted 41 such jurisdic- tions as part of its "harmful tax com- petition" project earlier this decade and is now trying to bully them into changing their attractive policies. The European Commission has sev- eral anti-tax-competition schemes, including a "saving tax directive" that seeks to coerce low-tax jurisdictions into helping Europe's welfare states track - and tax - flight capital. And the United Nations has a Committee of Experts on International Tax Matters whose objec- tive is to impose global rules to hinder the flow of jobs and capital from high-tax nations to low- tax nations. As though this weren't enough, the G-20 communiqué last spring singled out tax havens for a crackdown.

The common theme of all these efforts is that politicians want to replace tax competition with tax harmonization. Tax competition exists when politicians feel pressure to improve tax policy so the geese that lay the golden eggs will not fly away. Ever since the Reagan and Thatcher tax-rate reductions began the process of tax competition, nations have been racing to lower rates in hopes of attracting - or retaining - jobs and investment. Since 1980 average top personal income tax rates in the developed world have dropped about 26 percentage points and corporate tax rates more than 21 points. And there are now 27 jurisdictions with flat taxes, an amazing development. No wonder the global economy notwithstanding current turmoil - is so much stronger today than it was in the 1970s.

According to stereotypes, tax havens are little islands in the Caribbean, and indeed that's true of some of the world's premiere offshore centers. But to be more accurate, a tax haven is any jurisdiction that satisfies two criteria: First, its tax laws are attractive to global investors and entre- preneurs, and second, it protects its fiscal sovereignty by choosing not to enforce the bad tax laws of other nations, at least when they are trying to tax economic activity outside their borders. This means, of course, that individuals and businesses from high-tax nations have the option of using those jurisdictions as havens against excessive taxation.

Havens Are in The Nationality of The Beholder

So what are the tax havens? Places such as Liechtenstein and the Cayman Islands belong on the list, but so do many "onshore" nations. One of the world's leading experts on offshore issues, Marshall Langer, wrote in Tax Notes International that "the most important tax haven in the world is ... Manhattan. . . . [T]he second most important tax haven in the world is London." The United States and United Kingdom are havens because the law enables foreigners to invest money and not report the income to their tax police. That's good for the U.S. and U.K. economies, and for foreign taxpayers.

By some counts there are more than 70 tax havens in the world, ranging from big nations like the United States to obscure, tiny jurisdictions such as Melilla, an autonomous part of Spain on the coast of Morocco, and Sark, a tiny British-controlled island off the coast of France. In some cases, such as the United States, the taxhaven policies are designed to attract global capital and are only available to foreigners.

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