In a referendum that is historic for being the first of its kind, Ecuador has voted to ban all politicians from having assets in tax havens. To many this will come as good news, for the term “tax haven” often conjures an incredibly negative image. The hoo-ha made by politicians would have us think that they are the reserve of slimy Russian oligarchs and unctuous property tycoons. But they’re not all that bad. Here's why tax havens might be a force for good in the global economy, reports Adam Smith Institute.
Firstly, they promote good tax policy around the world. This is because tax havens promote tax competition between jurisdictions, and this puts pressure on politicians in nations with oppressively high taxes to lower tax rates and reform their tax codes – as we have seen between in Ireland and the EU.
But this needn’t mean a race to the bottom must occur. Havens encourage positive reform of the worst kind of taxes in our economy, because that is what they are primarily used to avoid – namely taxes on our savings and investments. These taxes discourage innovation, investment and saving in our country.
The ASI has in the past advocated a progressive consumption taxation policy that would only tax consumption, not investment, and more generally a simplification of the UK tax code. This would in the long run make our country a wealthier and more prosperous place for all, and the kind of tax competition encouraged by havens promotes such reform.
It’s not clear that countries are making any kind of Faustian pact by acting as ‘tax havens’. For one thing, places that are considered tax havens are generally nicer to live in. Switzerland and Liechtenstein, are both very desirable places to be, and both are considered tax havens in the academic sense of the term. In fact, data from the World Bank reveals that nine of the 13 richest jurisdictions in the world are in fact tax havens.
There is also a moral argument to be made for tax havens, though today it is largely irrelevant in the West. Millions across the world face hostility from their governments. From the Rohingya Muslims in Myanmar, to the ethnic Indians in East Africa, when you belong to a persecuted minority group, it makes sense to protect your family’s interests by putting your money somewhere the tentacles of the politicians cannot get to.
The kind of financial privacy laws that make tax havens so attractive to Swedish entrepreneurs who want to escape harsh taxation are the exact same laws that protect people from other forms of persecution.
Imagine you were a Jewish businessman in the Middle East. Being able to keep your assets safe in a tax haven might be the only thing between you and insolvency if your government decides to seize people’s assets illegally. Or, alternatively you might be a farmer in Zimbabwe (or any other banana republic dictatorship), a nation where on a whim the ruling powers could confiscate (or render valueless) your money. Being able to put your assets into a safer place could be the one thing that ensures your family has enough money to make it through the year.
However, ultimately, these arguments may just be moot points. For exactly what constitutes a tax haven is ambiguous and incredibly hard to define. This means that often legislating about them is difficult. Because of this, instead of trying to demolish and vilify low tax jurisdictions, perhaps we should just try and beat them at their own game.