The Alleged Harm Done By Tax Havens

by | Sep 1, 2002

Tax burdens imposed by the world’s welfare states — especially those imposed on the wealthiest, most successful entrepreneurs and shareholders — have increased with every passing year. No wonder “Atlas is Shrugging.” By accessing tax havens (or any other manner of lowering the tax burden), income-producers maximize their after-tax returns — and hence the investment […]

Tax burdens imposed by the world’s welfare states — especially those imposed on the wealthiest, most successful entrepreneurs and shareholders — have increased with every passing year. No wonder “Atlas is Shrugging.” By accessing tax havens (or any other manner of lowering the tax burden), income-producers maximize their after-tax returns — and hence the investment returns available to investors.

But the tax havens are under attack — from the leaders of high-tax, welfare nations. And those who access tax havens have been characterized as evil — as “unpatriotic tax cheats” who deprive the high-tax nations of what they call their “rightful” revenue and prevent welfare-states from playing the role of Robin Hood. Moreover, high-tax nations are pressuring relatively lower-tax industrialized nations (like the U.S.) to raise taxes. This is a set-up, not to find a proper remedy for growing tax avoidance (by reducing the welfare state and its tax burdens) but to impose still greater burdens. That’s a threat to greater income-earning and investment returns.

In its April 1998 report, “Harmful Tax Competition: An Emerging Global Issue” — and a follow-up report issued in June 2000 (“Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices”) — the OECD made the following, ominous remarks (emphasis added):

“Globalization has had the negative effects of opening up new ways by which companies and individuals can minimize and avoid taxes.” “Because tax havens offer a way to minimize taxes and to obtain financial confidentiality, they are appealing to corporate and individual investors.” “In addition to tax factors,” havens “contribute to their success” by providing “a relaxed regulatory framework and the presence of a solid business infrastructure.”

In this passage, the OECD clearly believes that it is the capitalist policies adopted in other countries that pose a “threat” — to high-tax policies of OECD nations, not to the capitalists who move their capital there.

In the following passage the high-tax OECD nations see themselves as victims of other (low-tax) nations’ success and worry that if low-tax policies are allowed to persist, they will force OECD nations to cut their own taxes.

“A harmful preferential tax regime will be characterized by a combination of a low or zero effective tax.” “Harmful preferential tax regimes can distort trade and investment patterns and are a threat to both domestic tax systems and to the overall structure of international taxation. They undermine the fairness of the tax systems, cause undesired shifts of part of the tax burden from capital to labor and thereby may have a negative impact on employment.” “Harmful tax practices may exist when regimes are tailored to erode the tax base of other countries. This can occur when tax regimes attract investment or savings originating elsewhere.” “Pressure of this sort can result in changes in tax structures in which all countries may be forced by spillover effects to modify their tax bases.”

In the following passage the OECD ignores the fact that investors must maximize after-tax returns — and that the main reason taxes have become a “dominant factor” in capital allocation is that taxes are so high in the first place:

“Tax should not be the dominant factor in making capital allocation decisions.” “Governments must take measures . . . to protect their tax bases and avoid the world-wide reduction in welfare caused by tax-induced distortions in capital and financial flows.” Tax havens “may hamper the application of progressive tax rates and the achievement of redistributive goals.” OECD “governments cannot stand back while their tax bases are eroded through the actions of countries which offer taxpayers ways to exploit tax havens and preferential regimes to reduce the tax that would otherwise be payable to them.” (emphasis added)

In denouncing havens for adopting tax systems with so-called “preferential features,” the OECD avoids a proper condemnation of its own member nations for adopting tax systems with punitive and prejudicial features. The OECD also makes clear that it wants to avoid tax cuts so as to preserve the welfare spending of its members. And the OECD’s maniacal obsession with preserving welfare states and their high tax burdens leads it to openly evade facts. In its own words, the OECD says it doesn’t care about proving its case of alleged harm:

A regime can be harmful even where it is difficult to quantify the adverse economic impact it poses. . . . Despite the inability to measure the economic damage, countries would agree that such regimes are harmful and should be discouraged. (emphasis added)

The OECD also ridicules the activities of investors and firms that relocate to havens, claiming that they’re not really engaging in “substantive business activities” — as if investing capital and preserving wealth amounts to mere paper-shuffling. Only investment in plant, equipment and operations, it says, constitute “substantial activities.” But what if havens attract those activities? The OECD reveals its own hypocrisy by promising to stop them, as well:

OECD regulators and tax authorities should focus on “geographically mobile activities, such as financial activities, including the provision of intangibles” and defer for, later action, “tax incentives designed to attract investment in plant, building and equipment.” (emphasis added)

The OECD — in an argument later echoed by U.S. Congressmen — also heralds the allegedly wonderful “public services provided by welfare states” and says tax havens and tax cuts in OECD nations “could lead governments being unable to meet the legitimate demands of their citizens for public services.” In Part One of our report we argued that, on the contrary, the “services” of the welfare state are wholly destructive of wealth – including New York skyscrapers.

Supposedly the OECD cares about the “legitimate demands of citizens,” but not the citizens who are wealthy — except to the extent they can be used as milch cows to fund the burgeoning welfare state. The “demands of citizens for public services” allegedly trumps the right of producers and taxpayers not to have their wealth confiscated. The desires of the wealthy are seen as illegitimate and secondary to those of the non-producers and bureaucratic parasites.

References:

1 “Capital on Strike: The Tax Haven Controversy — Part One,” The Capitalist Advisor, InterMarket Forecasting, Inc., May 21, 2002.

2 OECD, “Harmful Tax Competition: An Emerging Global Issue,” April 1998 (available at www1.oecd.org/daf/fa/harm_tax/harmfultax_eng.pdf.)

3 OECD, “Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices,” June 2000 (available at www.oecd.org/daf/fa/harm_tax/Report_En.pdf)

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Dr. Salsman is president of InterMarket Forecasting, Inc., an assistant professor of political economy at Duke University and a senior fellow at the American Institute for Economic Research. Previously he was an economist at Wainwright Economics, Inc. and a banker at the Bank of New York and Citibank. Dr. Salsman has authored three books: Breaking the Banks: Central Banking Problems and Free Banking Solutions (AIER, 1990), Gold and Liberty (AIER, 1995), and The Political Economy of Public Debt: Three Centuries of Theory and Evidence (Edward Elgar Publishing, 2017). In 2021 his fourth book – Where Have all the Capitalist Gone? – will be published by the American Institute for Economic Research. He is also author of a dozen chapters and scores of articles. His work has appeared in the Georgetown Journal of Law and Public Policy, Reason Papers, the Wall Street Journal, the New York Times, Forbes, the Economist, the Financial Post, the Intellectual Activist, and The Objective Standard. Dr. Salsman earned his B.A. in economics from Bowdoin College (1981), his M.A. in economics from New York University (1988), and his Ph.D. in political economy from Duke University (2012). His personal website is richardsalsman.com.

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