February 28, 2007

The Economist Endorses Offshore Tax Havens

The Economist last week presented a 14-page special report on why offshore tax havens are good for us. In 2005 the Tax Justice Network estimated that $255 billion in revenues is lost each year from governments whose citizens hold their funds in offshore tax havens, a figure the magazine says "not everyone believes" even though no one has ever shown this number to be inaccurate. The effects of offshore financial centers (what we might call havens) are divided into two categories. One effect is tax evasion, which the Economist and everyone else claims to recognize as harmful, and the second is "tax competition" which is presented as being beneficial and even outweighing the harm from tax evasion.

Several arguments are made that "tax competition" is important and healthy. One is that governments need an incentive to lower their corporate taxes to a (low) level that will benefit the economy. But if low corporate taxes were so good for us, surely that seems like the sort of decision our elected government is supposed to make and is quite capable of making. Another argument cited is that tax havens actually help larger countries with normal tax rates like ours by lowering the effective rate paid by companies, who in turn find our country a more tolerable place to invest. Again, if lowering the effective tax rate would attract so much investment to our country that the loss of revenue would be outweighed by the increase in investment, surely that is exactly the sort of decision our elected government can make. How could it possibly be just to say that tax havens help us by allowing companies to evade the tax laws that our elected government decided were optimal?

Another argument mentioned is that perhaps companies in larger countries with normal tax rates like ours receive so many benefits from their subsidiaries in offshore financial centers that it helps our economy in the end. Perhaps that's true in some cases. But a lot depends on what these subsidiaries really are. Insofar as any of them are the "companies" that really exist on paper only for tax avoidance purposes, this argument cannot apply. Senator Kent Conrad (D-ND), during a recent meeting of the Budget Committee which he chairs, described how 12,000 "companies" claim to inhabit one five-room building in the Cayman Islands. These "companies" can hardly be said to create a benefit for anyone except the owners who are evading taxes in the U.S. and other larger countries.

Which brings us to the point that a lot of what's going on in "offshore financial centers" is really tax evasion and is therefore quite illegal. On ways to stop tax evasion, the authors seem to endorse information sharing between jurisdictions. That's an easy solution anyone can agree on - except the jurisdictions that profit from their refusal to hand over such information and the lobbyists who represent their customers. Another suggestion is that jurisdictions like the United States lower their taxes to reduce the incentive for tax evasion. By that logic we could reduce speeding on America's highways by raising the speed limits to 150 mph, or reduce stealing by abolishing property rights. If you want real solutions for dealing with tax havens and other causes of the tax gap, see Bob McIntyre's suggestions to the Senate Budget Committee.


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