Why Are There Tax Havens?
Rosenzweig, Adam H., William and Mary Law Review
Recently, the issue of tax havens has risen to the fore of the fiscal policy debate, with tax havens being singled out as the root cause of many of the fiscal shortfalls plaguing the governments of the world. Surprisingly, however, although there has been a fair amount of literature on why tax havens are harmful to the modern international tax regime, which countries become tax havens, and what means are available to combat tax havens, there has been less written specifically on the underlying question of why, notwithstanding all these points, tax havens exist in the first place, or why they persist in the face of such overwhelming criticism. This Article will fill that gap by directly confronting the question: why are there tax havens?
To this end, this Article will propose for the first time that the focus of the international tax laws of wealthier countries, such as the United States, on capital neutrality---or making the flow of capital across borders easier and cheaper--can actually create or exacerbate the incentives necessary for poorer countries to act as tax havens. This can be thought of as a "capital neutrality paradox" in that it is the pursuit of capital neutrality--meant to increase worldwide efficiency--which leads to more countries acting as tax havens, effectively undermining worldwide efficiency. Consequently, punishing such countries in response would also prove counterproductive, because it would only exacerbate these incentives created by U.S. law in the first place. This "punishment paradox" in connection with the "capital neutrality paradox" can fundamentally alter the way in which the law should conceptualize and respond to the issue of tax havens. Rather than ask "why are there tax havens?" the question would become "why pursue capital neutrality?"Rather than ask "what can we do to punish tax havens?" the question would become "would punishment be effective?"Such an approach could not only lead to a more efficient international tax regime, but could also be the first step to finally answering the question of why there are tax havens.
INTRODUCTION I. THE INTERNATIONAL TAX REGIME: THE PROBLEMS OF DOUBLE TAXATION AND TAX COMPETITION II. DOUBLE TAXATION RELIEF AND TAX COMPETITION: THE TWO PARADOXES A. The Capital Neutrality Paradox B. The Punishment Paradox C. The International Tax Paradoxes Operationalized 1. Territorial Exemption and Tax Competition 2. Worldwide Tax Base, Credits, and Blending III. HOW DID WE GET HERE? THE MOVE TO NEUTRALITY AND THE RISE OF THE INTERNATIONAL TAX PARADOXES IV. TOWARD RESOLVING THE INTERNATIONAL TAX PARADOXES CONCLUSION
A raging debate on the perils of tax havens grips the nation. Unscrupulous taxpayers indefinitely defer paying their fair share of U.S. taxes by funneling their income through artificial companies in tax haven countries. Tax havens threaten the long-term fiscal health of the country, undermining the ability of the government to address the pressing economic and social emergencies of the day, and thus the integrity of the modern state itself. The alarm has been raised, the gauntlet has been thrown; leading academics have been decrying the use of tax havens as "tax witchcraft," (1) and even the President of the United States himself has been imploring Congress to act. (2) Is this a description of the state of U.S. tax policy in 2010? No--it describes international tax policy debate in the late 1950s and early 1960s. Yet, despite over fifty years of debate, scholarship, analysis, legislation, and regulation, if one simply listened to the modern debate over tax havens, it would appear that little progress has been made over that time. (3)
What can explain this lack of progress? (4) It cannot simply be attributable to myopia, inertia, or laziness; after all, the United States has enacted or fundamentally revised comprehensive antitax-haven legislation in 1962, (5) 1976, (6) 1986, (7) and 1993, (8) and it is currently the driving factor behind most international tax policy. …