Ten Myths About Tax Havens

This article was published in Spanish in El Confidencial

“A tax loophole is something That benefits the other guy. If it benefits you, it is tax reform.” Russell B. Long
“A war on tax havens is nothing but an Attempt to Increase taxes to prop up bankrupt welfare states, to continue feeding the leviathan” Charles Gave

Tax evasion and money laundering are big problems. But those problems are solved with a strong legal and penal system, not attacking tax competition and foreign investment.It is not a coincidence to see a debate on tax havens at the same time as we live the period of greatest financial repression since the 70s, when political spending in OECD countries soars to record highs. Tax havens are the new “scapegoat”.

In my opinion, the main mistakes in this debate are:

1) Tax heavens or tax hells? The debate throughout Europe starts with a translation error that is not accidental, nor irrelevant .  Many European countries translate Tax Haven as Tax Heaven (paradis fiscal, paraisos fiscales). It’s a very important semantic difference.  It is important, because that translation error occurs, not by chance either, in countries where the most interventionist policies are implemented. The assets of banks in tax havens have increased approximately ten trillion dollars since 2001. According to Harvard University, the increase in these assets happens almost always after the tax burden increases with about twelve months difference. That is, the movement of capital out of tax hells comes AFTER tax increases. It is NOT the cause of these tax increases, as some want to tell us, but a consequence of financial repression.

2) They shelter illegal funds. Another myth is putting everything under the “illegal” banner. In late 2010, according to Tax Justice, the fifty largest banks managed 12.1 trillion dollars in assets offshore . This is known data, with operations that are legal, either from investments or corporate accounts. The vast majority comes from companies with multinational trade agreements seeking two objectives. One is to grow and develop their activities in the world without incurring in double taxation, which creates many more social benefits, employment and wealth than capital controls. Another is to safeguard funds from complex countries. For example, Venezuela and Argentina. Thanks to tax havens companies have been able to avoid instituted capital controls and confiscation of part of their investments in those countries.

3) Billions of lost tax revenue. According to the study “Do tax havens divert economic activity?” (B Mihir A. Desai, C. Fritz Foley, James R. Hines Jr.) empirical evidence shows that tax shelters do not reduce economic activity in high-tax countries, but actually increase it. Because assets are reinvested in sovereign debt, stocks and business projects in OECD countries with high taxation. Also, economic activity has not only increased with the growth of tax shelters, but has benefited mostly Western countries, as a large part of the money that is protected in tax havens from global totalitarian regimes is reinvested in the U.S., Europe and UK. This is an important factor, because we tend to forget the amount of money from honest citizens looking to take their money out of repressive dictatorial regimes.

4) They are in exotic locations. What is a tax haven? Nobody in Spain, for example, complained when its companies conquered the world buying assets and deducting goodwill from the tax base. Or when Spain gave huge incentives to foreign companies. Our benefits are always tax “reforms” and the others are “evasion” . Who decides what is a good or bad tax territory? Delaware, Nevada, Wyoming, Luxembourg, Malta, Cyprus, Andorra, Jersey, Ireland, Lichtenstein, Switzerland or even Navarra … all have distinct and significant tax benefits. Is Cayman bad and Luxembourg good? Why?

5) They generate unfair tax competition. We talk about tax harmonization as a panacea. Except that harmonization is not the echo of the Beach Boys singing Our Prayer, it means raising taxes on everyone . A confiscatory state never has enough. And it does not save in prosperous times. It is precisely the tax competition of different countries what prevents you from working for the government until September, as happened a few decades ago. In 1979, the average personal income tax in the OECD in the top range exceeded 67% and the corporate income tax was 50%, plus there were taxes on capital of all kinds. (you can read it here). Was the State more efficient before and countries enjoyed greater wealth? No. Today, thanks to openness and tax competition, we have much lower taxes.(Tax burden on families. Source: OECD)

6) Competing with tax havens is a race to zero. No, it’s not. Tax havens have levels of public spending that stand around 25% of GDP. That, in itself, precludes the race to zero. In any case, the race must be to provide services that citizens view as adequate and of quality. As Will Rogers said, “the best that can be said of the tax system is that, thank God, we don’t have the amount of government that we pay for”.

7) We can eliminate tax havens. There will always be tax competition. The same as in the 70s France was a tax haven for the British, there will always be a sovereign country to attract capital efficiently. Or do we really think Brussels will impose its tax system to China-Hong Kong, Singapore, Dubai, etc.? How? By cutting trade? Please. Capital restrictions led us to the worst recession since the Second World War … and above all, they did not work. Tax evasion and the underground economy in Europe in the 70’s were higher than today in terms of GDP. Another thing I love is the issue of transparency. According to the World Bank, most of the major tax shelters have better corporate governance and transparency than … France.

8) They finance terrorism and money laundering. The Institute of Governance at the University of Basel made ​​a very detailed analysis of countries with a high risk of terrorist financing and money laundering, and out of twenty-eight countries identified only one can be considered “tax haven”. Money laundering and terrorism will always exist, unfortunately and what needs to be done is to attack the source, and apply strong criminal prosecution policies.

9) The perception that tax havens are no risk. Investing offshore is expensive, costing millions of dollars in commissions, and it is also complex and risky. Very risky. Why do people do it then? Because in cases we have turned our countries into tax hells that pursue predatory policies. Question: Where are deposits safer, in Cyprus or in Jersey? In Cyprus, where deposits are guaranteed up to € 100,000, while in Jersey and similar tax havens they are only insured up to 50,000 (pounds).

10) The argument that states that without tax havens there would not have been a crisis. We are overwhelmed with figures. Billions and billions. Of course, all estimates. And also, this is very important-confusing assets with liabilities and capital accumulated with annual profit. I use two figures. Eight trillion dollars, according to the Boston Consulting Group and 21 trillion, according to Tax Justice, which has a tad of interest in inflating the figure. But it does not matter. Assume that these figures are true and that all belonged to OECD citizens and assume a 20% tax -to be generous- which, of course, would be applied only once. What do we find? That with all proceeds we would not cover the deficit in the last three years of the OECD. If the US taxed 20% what some say American companies hold in foreign accounts, it would not cover the 2012 deficit.

The current crisis is due to government mismanagement of bubble-period revenues that they assumed would be eternal. Tax revenues in the EU do not collapse due to selfishness, but because investment conditions are atrocious and taxes too high for people to invest.

Globalization, free movement of capital and trade have made ​​possible to enjoy the rights that many now claim. Tax havens do not thrive when there is a fair and low tax environment. Returning to capital controls and the nanny state lead to equality in misery.

The best policy against tax havens is not to become a tax hell.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

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