Tax and Fiscal Policy

In defence of tax havens

Yesterday, 355 economists signed a letter co-ordinated by Oxfam arguing that tax havens have “no useful purpose”.

There are some luminaries among the signatories. Angus Deaton, winner of last year’s Nobel Prize for economics, is perhaps the most notable. However, rather oddly, over half the signatories come from Italy or Spain, with well over one-third from Italy alone. And the signatories include people who work for the UN which, in effect, acts as a tax haven for its employees.

In this letter on tax havens, there are echoes of the 364 economists’ letter to The Times back in March 1981, which attacked that year’s Budget. Most particularly, both letters over-egged the pudding thus making their case incredible. The 364 argued, among other things, that “present policies will deepen the depression”, which proved rather embarrassing when the economy came out of depression literally in the month the letter was drafted.

Similarly, the statement that tax havens “have no useful purpose” is demonstrably wrong and most of the other claims in the letter are incredible.

Offshore centres allow companies and investment funds to operate internationally without having to abide by several different sets of rules and, often, pay more tax than ought to be due. This is important. The 355 argue that at least $170bn of revenue is lost to governments through tax havens. However, these estimates assume that those who use tax havens do not pay tax in the countries in which they reside. As the Panama Papers showed, David Cameron – to take a prominent example – once had money in a tax haven but paid UK tax. Similarly, companies that avoid tax in offshore financial centres pay dividends that are then taxed in the hands of their investors in the countries in which they reside.

Investors who use tax havens can avoid being taxed twice on their investments and can avoid being taxed at a higher rate than that which prevails in the country in which they live, but they do not avoid all tax. Even anti-tax haven campaigner Richard Murphy, one of the signatories to the letter, has said: “The tax abuse is to some degree, in some of them certainly, virtually history, and it certainly isn’t why large companies are now using them.”

The secrecy of tax havens is a double-edged sword. Of course, it is true that secrecy allows the corrupt to shield their money from the tax authorities – the Panama Papers certainly revealed that. However, tax havens also allow the honest to shelter their money from corrupt and oppressive politicians. And this leads to perhaps the most interesting aspect of this campaign against tax havens.

Oxfam uses Malawi as a case study. It argues that, if it were not for money sheltered in tax havens, there would be more money to spend on healthcare for Malawians.

Malawi is a country beset by problems. Aid was suspended in 2013 due to public looting on a horrendous scale; government spending is an incredible 50 per cent of national income – off the scale for a developing country; and much of the business sector is nationalised.

The idea that the Malawian people would be better off if its government had more tax revenues beggars belief: Malawi’s problem is its government.

Indeed, one of the advantages of tax havens is that they help hold governments to account. They make it possible for businesses to avoid the worst excesses of government largesse and crazy tax systems – including the 39 per cent US corporation tax rate. They have other functions too: it is simply wrong to say that they have no useful purpose. It is also wrong to argue that, if only corrupt governments had more tax revenue, their people would be better served.

Of course, criminals operate in tax havens. In the same way, burglars operate where there is property. However, we would not abolish property because of burglars. We should not abolish tax havens either.

This article was first published in City AM.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.