Tax Havens and black money have been in the news for the past couple months. Earlier this month, Oxfam released a statement with 355 economists contending that Tax Havens serve ‘no useful purpose.’ These included eminent personalities like Thomas Piketty (author of Capital in the 21st Century), Jeffrey Sachs and Angus Deaton (winner of last year’s Noble prize in Economics).
The letter contended, among other things—that tax havens undermine countries’ ability to collect their ‘fair share of taxes.’ Which leads us to a fundamental question—what is, really, a country’s fair share of taxes and a fair rate of taxation? There is another question tied to this—where does the state get the authority to tax people as it wishes?
To the latter question, one might contend that the state gets that authority by virtue of it being sovereign—a state that is free from outside interference and possesses the right (or more properly, the power) to impose laws on the citizens within its territory. But while sovereignty may imply that a state has the right to frame rules (including, of course, the rules and rate of taxation), it does not imply that it has an unfettered right to make any rules on any matter. In this, of course, it is constrained by political considerations—on what is politically feasible and expedient; and constitutional and procedural constraints. But there are also, more fundamentally, moral considerations in all of this.
Is it a morally tenable position for a state to tax its citizens, say, 90% of what they earn? Even if sovereignty gives the state the right to make such a rule, does it give it any moral legitimacy? Would it not be prudent and morally legitimate for an individual to escape such a regime and move away from such a state, or at least park his money elsewhere?
States do not have the authority (at least not a moral authority, which governments so unabashedly assume and proclaim) to tax citizens excessively. Sovereignty exists at the level of the individual too. In fact, it is easier to define and articulate the sovereign individual than it is to define the sovereign state.
Apart from the state not having the absolute right to tax however it wishes—the second consideration is this sovereignty of the individual itself. Sovereignty implies being free from outside interference and having autonomy over ones affairs. An individual has the right to keep his earnings and the fruits of one’s labour—that’s sovereignty too.
If then, as many contend, that tax havens, by giving individuals an alternative to high-tax jurisdictions, ‘undermine’ the sovereignty of high-tax jurisdictions;One can reasonably argue that high-tax jurisdictions undermine individuals’ sovereignty by taxing them excessively. A state needs to justify why it takes from the people in its territory as it does, far more than an individual needs to justify why he or she gets to keep the fruits of his or her labour.
Now considering the other point—the letter contends that tax havens have no useful economic consequences, and do not add anything to ‘global health and well-being’. That is demonstrably false. Far from harming the global economy, tax havens allow capital to escape high-tax jurisdictions to low-tax jurisdictions; and much of this capital even finds its way back home—with empirical data suggesting that tax-havens do not divert economic activity. As Daniel Mitchell points out, tax havens serve many useful purposes—from economic benefits and better tax policy, to better governance and more robust institutions.
To prove their point, the eminent economists of Oxfam took the example of Malawi, contending that tax dodging deprives the African nation of much needed tax-revenue that can fund its healthcare and education programs. But Malawi’s problem, as the IEA economist Philip Booth points out here, is not the lack of tax revenue—it is high taxes and a big, corrupt government. To think that greater tax revenues would solve Malawi’s problems is fanciful to say the least. It will do little to address the fundamental problem, which is the lack of robust institutions and good governance.
The letter further points out to the problem of corruption. But contrary to popular perceptions, a majority of the major Offshore Financial Centres (OFCs) are actually very well-regulated and comply with international rules on money laundering. The critics of tax havens conflate the issues of money laundering and corruption with tax havens. While there might be particular institutional or policy reforms in certain tax havens that are required to address the question of money laundering, by no means do concerns about corruption justify an outright clampdown on all tax havens and all tax competition. Neither is the problem of money laundering restricted to tax-havens–the greatest offenders, according to an annual report by Basel Institute of Governance, are high-tax jurisdictions with weak institutional frameworks.
The letter quotes Adam Smith to lend credence to their contentions.“The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax. . . . A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society.”
source:spontaneousorder