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Why tax havens are fraudulent
I usually enjoy reading Economic Logic, but this post defending tax havens seems badly wrong headed to me. It misses the essentially fraudulent character of tax havens.
The argument is that tax havens are engaging in legitimate tax competition. I will leave aside the question of whether tax competition is a good thing (I think not) for another post. My point here is that what tax havens do is very different.
Suppose a manufacturer makes widgets in Spendland and exports them to Consumeria at $100 each, making a pre-tax profit margin of 40%. Spendland has a tax rate of 50% so its net profit margin is 20%.
Suppose the manufacturer relocates its manufacturing to Misertopia where costs are higher, so it only makes a pre-tax profit of 30%, but it is only taxed at 20%, so the net margin rises to 24%.
That is tax competition by Misertopia.
Now suppose that instead of relocating its operations, the manufacturer sets up a subsidiary in country Haven, a tax haven that does not charge any tax on companies without operations in Haven. The subsidiary has no actual operations, and owns no assets apart from bank balances.
The manufacturer then continues to make its products in Spendland and ship them to buyers in Consumeria. However the products are sold (at the point of export) to the subsidiary in Haven at $60, which then sells them on to the buyers in Consumeria at $100.
The result of this is that the manufacturer now makes no profit in Spendland. It instead makes exactly the same profit in Haven where it is not taxable. The same people make the same widgets in the same factory, they are shipped in the same way to the same buyers. The extra changes of ownership means that not tax is paid. This is not competition: it is a fraud on the people of Spendland — especially those who do pay their tax.
Of course this example is simplified. In real life it would be complicated by the need to avoid any anti-avoidance provisions in Spendland’s tax regulations. Of course, the simple way can still be used if one is willing to falsify tax returns!
It gets worse. Tax havens offer secrecy. This is because those who use them are lying to their home country authorities and do not want to be caught. Tax havens offer structures that are intended to encourage deception. A post on Richard Murphy’s Tax Research blog describes how Lichtenstein does this.
If you follow the logic of addressing tax evasion though competing with tax havens, you will come, as Economic Logic does, to the conclusion that rates of tax on income should be set at the same level as the havens: zero.
Economic Logic’s suggested solution of raising consumption taxes has a fatal flaw: they are inevitably regressive (the rich pay a lower proportion of their income in tax). The rich spend a lower proportion of their income. Higher tax rates on luxury goods, or tax credits, do not solve the problem. They may make the system progressive going from low to middle incomes, but they will make it even more regressive going from middle to high incomes (or from high to very high).
Like every substitute for progressive income taxes (flat taxes, poll taxes, etc.) theirr effect is to let the rich pay low taxes, while squeezing the middle class.
The real solution is to squeeze the tax havens and penalize those who use them. Those who do not like paying taxes in the country they live in should be told to pay up, go to jail, or move elsewhere.
The last option should require a genuine move, not a pretence based on being their part of the time as many rich British people living in Monaco do.
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