A Defense of Tax Havens

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After years of constant attacks from Obama, the OECD and the G20 during which ‘Tax Havens’ have been blamed for everything from causing the credit crisis to being the base for criminal activity, it is time to re-consider and think about what tax havens really are, and why they are necessary.

The Bourne Identity – many of you have seen it. And you may remember a scene where he walks into a bank in Switzerland, a lavish place with impeccably dressed, wealthy people. Bourne writes a number on a scrap of paper, places his hand on a scanner and is given access. No names are given or needed, the safe box is given to him in a private booth where he proceeds to analyse his numerous fake passports, millions of dollars in cash and a pistol. All anonymous, no questions asked….

All nonsense of course, but sadly the image held by many including, it would seem, many important politicians if we are to believe every word that comes out of their mouths whenever the subject of tax havens is brought up. Maybe it is prudent to clarify that numbered Swiss accounts do not exist and indeed never have. Tax havens do not allow you to deposit suitcases full of money with no questions asked. They are all regulated and have KYC procedures which are internationally approved and they all report criminal activity if detected. We should begin by looking at what tax havens are, and why they are under attack.

It is worth noting that no universally agreed definition of ‘tax haven’ actually exists and, in fact, they are known by many different names including secrecy havens and low tax jurisdictions amongst others. Maybe a simple starting point would be to say that a tax haven is any jurisdiction, anywhere, that has preferential rules for foreign investors – in so much as taxes are lower.

When we get to specifics as to what constitutes preferential, low tax, privacy, Swiss banking secrecy etc. – this is where the confusion starts, but it is not unreasonable to assume that with the world economy in crisis, many (formally) powerful economies around the world are in need of a boost and recovering taxes by launching an unprecedented and wholly inadvisable assault on tax havens is the way many of them seem to be interested in proceeding.

The waves of attacks are coming from a coalition of the G20 countries with the bureaucracy being handled by the OECD and is being masterminded by Obama and the U.S. government (from which a large number of politicians have successfully utilized the benefits of tax havens for years and recently were exposed as owing hundreds of thousands in unpaid back taxes…). So why are these attacks taking place and how is it being done?

The first question divides opinion. The official line is that the offshore industry is worth trillions, and the missing taxation is what is needed to fix the crisis. The governments sell the line that tax haven activity is criminal, it always involves tax evasion (the words tax avoidance seen to be disappearing from their vocabulary) and that this activity from the super-rich is preventing recovery. Amazingly many members of congress, along with the French President Nicolas Sarkozy amongst others, have even attempted to blame tax havens for being responsible for the global crisis and are appealing to our morals to do what must be done to punish the individuals that utilize these tax planning tools and desire financial privacy.

We need to be quite clear that tax havens were not responsible for the global crisis. The situation is complex but drastic over-lending, the explosion of the sub-prime mortgage market, poor financial decision making and even poorer regulation in the entire financial industry as well as the government inactivity which allowed this t happen are the real causes. You would do well to remember that big business always gets preferential treatment from governments, and the appearance of a scapegoat is extremely convenient for them. If you doubt this you may wish to investigate why companies such as Google, Microsoft and Facebook all have their administration offices in traditional tax haven locations, why nothing is done and why these huge financial companies are always amongst the biggest contributors in presidential campaigns.

So how can the existence of tax havens be defended if they do, in fact, allow individuals to pay less tax than they would have to in their own country? Maybe it is best to dispense with the idea that tax havens stunt economic growth…..

The only way to encourage growth is to encourage activity and that is not done with high taxation. U.S. companies are forced to move or base themselves elsewhere due to high corporate taxation and income is already taxed before it is invested, taxing again as capital gain simply discourages growth. Businesses and individuals discouraged from working or being innovative in the marketplace may simply choose to work and save less, which will not fix the problem. ‘Ending’ tax havens, which isn’t going to happen, at least not any time soon, would simply result in higher tax rates around the world, thus reducing economic growth and making the world poorer.

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