So I was delighted to see a new monograph from the London-based Institute of Economic Affairs on the benefits of “offshore” financial centers. Authored by Diego Zuluaga, it explains why low-tax jurisdictions are good news for those of us laboring in less-enlightened places. He writes:
“Offshore finance serves several purposes, the most salient of which is the efficient allocation of capital. Some of this activity is tax-related, aimed at raising after-tax investment returns. If it were not for offshore jurisdictions, much foreign investment would be vulnerable to double or triple taxation. Because under such punitive rates of tax, some of this investment would not take place, the existence of offshore centres has real positive effects on economic activity alongside the (plausibly) negative impact on the tax revenue of individual countries. These welfare gains have been amply documented … Beyond their impact on aggregate investment, research shows that the existence of an OFC is associated with better economic outcomes in neighbouring countries. Contrary to the popular narrative, these jurisdictions are well-governed and peaceful. Who, after all, would wish to use intermediaries in places where investors were regularly expropriated or harassed? … It is difficult to imagine the process of globalisation that has taken place over the last fifty years, bringing hundreds of millions of people out of poverty, happening without the robust financial and legal framework which offshore jurisdictions provide for investment. It would be counterproductive, for both the developing and the rich world, to undermine their essential functions …. Clamping down on offshore centres … would make societies less productive and prosperous, and this effect would compound over time.”
He provides some fiscal history, including the fact that government used to be very small in the industrialized world (indeed, that is one of the big reasons why today’s rich nations got that way).
And he notes that low-tax jurisdictions became more important to global commerce as governments adopted dirigiste policies.
Zuluaga points out that low-tax jurisdictions have a much better track record in the fight against bad behavior than high-tax nations.
He concludes with a warning about how the attack on tax havens is really an attack on globalization. And the global economy will suffer if the statists prevail, writing:
“… an ominous alliance of revenue-greedy politicians, ideological campaigners and rent-seekers has emerged in recent years. Gradually, but relentlessly, they aim to dismantle the liberal financial order of which free capital movement is a fundamental component …. the alliance’s real goal: to eliminate tax competition and constrain the movement of capital in order to bring it under their control. The consequences of this effort would be long-standing and go far beyond a few tiny offshore financial centres.”
Excellent points. I strongly recommend reading the entire publication.
Though I’m not sure Zuluaga and I agree on everything. His article notes, seemingly with approval, that offshore jurisdictions largely have agreed to help enforce the bad tax laws of onshore nations. Yet that is a recipe for the application of more double taxation on income that is saved and invested, which he acknowledges is a bad thing.
In other words, I think financial privacy is a good thing since predatory governments are less likely to misbehave if they know taxpayers have safe (and confidential) places to put their money. Now that privacy has been weakened, however, anti-tax competition folks at the OECD are openly chortling that there can be higher taxes on capital.
The bottom line is that tax competition without privacy is not very effective. I wonder if Zuluaga understands and agrees.
Another IEA author, Richard Teather, got that key point.
In a 2005 monograph, he explained the vital role of financial privacy.
“Although the country of residence may theoretically impose taxes on foreign income, it can only do so practically if its tax authorities have knowledge of that income. It is therefore common for tax havens to have strong privacy laws that protect investors’ personal information from enquirers (including foreign tax authorities). The best-known of these was Switzerland, which introduced banking secrecy to protect Jewish customers from Nazi confiscation, and there remains a genuine strong feeling in many of these countries that privacy is about more than just tax avoidance.”
But I’m digressing. Since we’ve looked at one U.K.-based defense of low-tax jurisdictions, let’s also look at some excerpts from a column by Matthew Lynn in the London-based Spectator.
He makes a very interesting point about how so-called tax havens are basically the financial equivalent of free zones for goods.
“… in a globalised economy, offshore finance plays an important role, enabling money to move across borders relatively easily. … Offshore centres … are now mainly financial ‘free ports’ – places where cash can easily be parked and transferred as it moves around the world.”
He also makes a very important observation about how the theft of data leading to the Panama Papers and Paradise Papers revealed very little illegal behavior. Which is a point I’ve made as well.
And here’s his conclusion.
“… it turns out that offshore centres are used by just about everyone. Most pension funds use them, including those looking after the savings of the politicians queuing up to condemn them. They are part of the infrastructure of globalisation, as much as the container ships, airports and fibre optic cables. It is ironic that many of the same people who proudly describe themselves as citizens of the world think that applies to everything except money.”
Amen. Once again, this is really a fight about globalization. Or, to be more accurate, a fight between good globalism and bad globalism.
Daniel J. Mitchell, chairman of the Center for Freedom and Prosperity, is on the Editorial Board of the Cayman Financial Review.