Tuesday, April 7, 2009

Last week’s Group of 20 statement on strengthening the world financial system railed against risks that tax havens pose to the world economy. Contrary to what this group of the world’s largest economies claims, “ending” so-called tax havens would not fix the world economic slump. The only impact that ending tax havens would have would be to raise tax rates around the world, thus reducing economic growth and making the world poorer.

The White House told this page that the existence of tax havens “costs countries tens of billions of dollars every year in tax revenue.” It also argues against tax havens because when businesses flee higher taxes, that “distorts business decisions, encourages inefficient outcomes and undermines effective valuation.”

What President Obama sees as problems, we see as benefits. High-tax countries face a problem - it is called competition. Wealthy and high-income people do not like giving the vast majority of their money to government, so they sometimes pick where they live based on tax rates. For this reason, competition keeps sensible countries from raising taxes too high because that can cause people and their resources to go elsewhere.

We see the same tax competition within our own shores. It is not surprising that someone such as Rush Limbaugh broadcasts from Florida, where there is no income tax, instead of New York, where his national career started but where taxes are high. The distortion decried by the White House isn’t the move to live or work in low-tax states or countries. The distortion is created by onerous taxes that make individuals and businesses look for more favorable financial climates.

The very definition of a tax haven used by the G-20 gives pause. The Organization for Economic Cooperation and Development (OECD), which the G-20 references, defines a tax haven as a country that is “characterized by low or zero taxation, a lack of transparency, and a refusal to provide information to foreign tax authorities.” In other words, low taxes are, ipso facto, bad. The transparency and reporting qualms are likewise nonsensical. There is no reason the citizens of a no-tax country should have their privacy violated to satisfy the curiosity of high-tax governments.

Wealthy people take up residency in countries such as the Bahamas, Monaco or Bermuda specifically because there is no income tax and they can keep more of their money. Monaco is considered one of the “worst” tax havens by the OECD. It is hardly surprising that in 2007, one out of every 5,400 residents in Monaco was worth more than $1 billion. That year, tiny Bermuda (population 67,800) had three billionaires, and it had the highest gross domestic product per capita in the world, $70,000. Rather than compete against what makes these places attractive, the G-20 wants to stifle competition by closing them down, thus protecting its own noncompetitive policies.

The only other claimed problems of tax havens is that they worsen the slump by not allowing the world to count the true value of global assets. This is irrelevant. A bank or other financial institution is solvent based upon the assets and liabilities it holds. The fact that there also is money in Bermuda or Liechtenstein or some other country is beside the point.

It is a sad sign of the times that the world’s largest economies need to be reminded that competition is good. Rather than forcing tax havens to be more like the rest of the world, we think tax havens serve as a protection against nutsy government policies. If G-20 nations truly wanted to undermine tax havens, they would attack the root cause and lower their own taxes.

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