Tax photo
At a time when both public deficits and government spending are increasing (bank bailouts and stimulus packages), there is immense political pressure to address the issue of tax havens. Liechtenstein, Monaco and others who still uphold strong banking secrecy laws are now under intense scrutiny.

The European Commission would like to see a system of financial data sharing, in which governments can access information about their residents’ financial state, no matter where they transfer their money. It is argued that this will enable governments to clamp down on tax evasion. Even ignoring the grave implications for civil liberties, it would, however, appear that the crusaders against tax evasion are taking the easy way out.

It is important to remember that tax evasion is already a risky endeavour. For example, when in 2008 an employee of a Liechtenstein bank stole files containing sensitive financial data and disclosed them to several tax authorities, a wave of arrests followed.

Moreover, if evasion occurs on a large scale, one could view this as a clear indication that taxation has reached excessive levels. With this in mind, it is not plausible that evasion could be eradicated or substantially reduced without incurring harmful side effects. In particular, it is reasonable to assume that many valuable economic activities would be scaled back if heavily-taxed individuals knew that there was no way of lowering their burden.

Furthermore, it is wrong to maintain, as the adversaries of tax havens implicitly do, that the amount of revenue a government “needs” is somehow “given” and that evaded money reduces the provision of essential public services. If this was the case, why do we often observe budget deficits in years when tax revenues are high?

For example, the government of Austria predicted a balanced budget for 2007. But even though that was a year of exceptional economic growth and buoyant tax revenues, the government stayed in the red. It had spent the windfall as quickly as it had earned it. With governments facing strong incentives to push spending well above optimal levels, the existence of loopholes like tax havens can act as an important check against spending excesses.

If they want to discourage tax evasion (and legal avoidance), governments should focus on restraining their spending, simplifying their tax codes and improving the incentives for work and enterprise – this would be a more effective economic strategy than heavy-handed international regulation based on a profound mistrust of their own citizens.

Kristian-Niemitz-2012_0.jpg

Head of Health and Welfare

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

6 thoughts on “Tax havens: the search for scapegoats”

  1. Posted 09/03/2009 at 14:17 | Permalink

    Many years ago I wrote a book called: ‘The Power To Destroy: a study of the British tax system’. The title, of course, comes from a famous saying by US Chief Justice John Marshall: ‘The power to tax is the power to destroy.’

    The thought has often occurred to me that, if he was right, then the power to avoid or evade tax may be the power to create.

  2. Posted 09/03/2009 at 14:17 | Permalink

    Many years ago I wrote a book called: ‘The Power To Destroy: a study of the British tax system’. The title, of course, comes from a famous saying by US Chief Justice John Marshall: ‘The power to tax is the power to destroy.’

    The thought has often occurred to me that, if he was right, then the power to avoid or evade tax may be the power to create.

  3. Posted 15/03/2009 at 02:55 | Permalink

    One comment on the section on the Government of Austria, you wrote;
    “It had spent the windfall as quickly as it had earned it.”

    You should have written;
    “It had spent the windfall as quickly as it’s citizens earned it.”

    Pedantic, I know, but it should always be reiterated that governments don’t earn money, they take it.

  4. Posted 15/03/2009 at 02:55 | Permalink

    One comment on the section on the Government of Austria, you wrote;
    “It had spent the windfall as quickly as it had earned it.”

    You should have written;
    “It had spent the windfall as quickly as it’s citizens earned it.”

    Pedantic, I know, but it should always be reiterated that governments don’t earn money, they take it.

  5. Posted 15/03/2009 at 18:29 | Permalink

    Hi all,

    Yes, tax haven crack-downs are a vexing issue for industrial countries. I for one, being from a country that has a sizeable and internationally recognized offshore trust and fiduciary industry, have never quite understood the premise for this crackdown?

    I never quite understood how is it ascertained who exactly is a tax evader and, how does one recognize from the onset a tax evader or a country, for that matter, that practices aiding and abetting tax evasion?

    It seems so vague. The OECD admits this. I liken it to the US Supreme Court’s policy on pornography; “you know it when you see it!”.

    Best,

    Yourihttp://globalviewtoday.blogspot.com/

  6. Posted 15/03/2009 at 18:29 | Permalink

    Hi all,

    Yes, tax haven crack-downs are a vexing issue for industrial countries. I for one, being from a country that has a sizeable and internationally recognized offshore trust and fiduciary industry, have never quite understood the premise for this crackdown?

    I never quite understood how is it ascertained who exactly is a tax evader and, how does one recognize from the onset a tax evader or a country, for that matter, that practices aiding and abetting tax evasion?

    It seems so vague. The OECD admits this. I liken it to the US Supreme Court’s policy on pornography; “you know it when you see it!”.

    Best,

    Yourihttp://globalviewtoday.blogspot.com/

Comments are closed.