I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.
[T]ax havens are very valuable because they discourage anti‐growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high‐tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent.
…Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro‐growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well‐run nation like Luxembourg or Singapore.
Since I didn’t have much space, I couldn’t go into much greater detail. Below the jump is a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.
Back in April, responding to an article written by Ann Hollingshead for the Task Force on Financial Integrity and Economic Development, I wrote a long post defending so‐called tax havens.
I went through the trouble of a point‐by‐point response because her article was quite reasonable and focused on some key moral and philosophical issues (rather than the demagoguery I normally have to deal with when people on the left reflexively condemn low‐tax jurisdictions).
She responded to my response, and she raised additional points that deserve to be answered.
So here we go again. Let’s go through Ann’s article and see where we agree and disagree.
A couple of weeks ago, I wrote a blog post criticizing the philosophies of Dan Mitchell, a libertarian scholar from the Cato Institute. I asked for a “thoughtful discussion” and I got it — both from the comments section of our blog and from Dan himself. On his own blog, Dan replied with a thought‐provoking point‐by‐point critique of my piece.
It has been a polite discussion, which is good because readers get to see that we don’t really disagree on facts. Our differences are a matter of philosophy, as Ann also acknowledges.
Dan made several interesting points in his rebuttal. As much as I’d like to take on the whole post right now, my reply would be far too long and I don’t think our readers would appreciate a blog post that approaches a novella. Rather I’ll focus on a couple of his comments that I find interesting on a philosophical level (there were many) and which demand a continued conversation because, I believe, they are the basis of our differences. We’ll start with a rather offhand remark in which Dan indirectly refers to financial privacy as a human right. This is an argument we’ve heard before. And it is worth some exploration.Unless I am very much mistaken, Dan’s belief that financial privacy is a human right arises out of his fundamental value of freedom. My disagreement with Dan, therefore, does not arise from a difference in the desire to promote human rights (I believe we both do), but rather in the different relative weights we each place on the value of privacy, which Dan (I’m supposing) would call an extension of freedom.
I wouldn’t argue with her outline, though I think it is incomplete. I’m a big fan of privacy as a principle of a civil and just society, but I also specifically support financial privacy as a means to an end of encouraging better tax policy. Simply stated, politicians are much more likely to reduce or eliminate double taxation if they feel such taxes can’t be enforced and simply put a country in a much less competitive position.
Okay, so on to [my] answer of the subject of this post. Privacy — and financial privacy by extension — is important. But is it a human right? That’s a big phrase; one which humanity has no business throwing around, lest it go the way of “[fill in blank]-gate” or “war on [whatever].” And as Dan himself points out, governments have a way of fabricating human rights — apparently some European courts have ruled that free soccer broadcasts and owning a satellite dish are a human rights — so it’s important that we get back to [philosophical] basics and define the term properly. The nearly universally accepted definition of “human rights” was established by the Universal Declaration of Human Rights, which the United Nations adopted in 1948. According to the UN, “human rights” are those “rights inherent to all human beings,” regardless of “nationality, place of residence, sex, national or ethnic origin, colour, religion, language, or any other status.” The Declaration includes 30 Articles which describe each of those rights in detail. “Financial privacy” per se is not explicitly a human right in this document, but “privacy” is, and I think it’s reasonable to include financial privacy by extension. But privacy is defined as a fundamental, not an absolute, human right. Absolute rights are those that there is never any justification for violating. Fundamental freedoms, including privacy and freedom from detention, can be ethically breached by the government, as long as they authorized by law and not arbitrary in practice. The government therefore has the right to regulate fundamental freedoms when necessary.
I’m not sure how to react. There are plenty of admirable provisions in the U.N.‘s Universal Declaration of Human Rights, but there are also some nonsensical passages — some of which completely contradict others.
Everyone hopefully agrees with the provisions against slavery and in favor of equality under law, but Article 25 of the U.N. Declaration also includes “the right to a standard of living adequate for the health and well‐being of himself and of his family, including food, clothing, housing and medical care and necessary social services.”
That sounds like a blank check for redistributionism, similar to the statism that I experienced when I spoke at the U.N. last month, and it definitely seems inconsistent with the right of property in Article 17.
I guess what I’m trying to say is that I don’t care that the U.N. Universal Declaration of Human Rights includes a “right to privacy” because I don’t view that document as having any legal or moral validity. I don’t know whether it’s as bad as the European Union’s pseudo‐constitution, but I do know that my support for privacy is not based on or dependent on a document from the United Nations.
As an aside, I can’t help noting that Articles 13 and 15 of the U.N. Declaration guarantee the right to emigrate and the right to change nationality, somethings leftists should keep in mind when they demonize successful people who want to move to nations with better tax law.
Getting back to Ann’s column, she confirms my point that you can’t protect property rights for some people while simultaneously giving other people a claim on their output.
That’s important because it means, that when it comes to freedom and privacy, we need to make choices. We can’t always have them all at once. To use a hideously crude example that gets back to the issue of tax evasion, in a developing country, a rich person’s right to financial privacy might be at odds with a poor person’s right to “a standard of living adequate for the health and well‐being of himself and of his family.”
For those who are not familiar with the type of discussion, it is the difference between “negative rights” promoted by classical liberals, which are designed to protect life, liberty, and property from aggression, and the “positive rights” promoted by the left, which are designed to legitimize the redistributionist state.
Tom Palmer has a good discussion of the topic here, and he notes that “positive rights” create conflict, writing that, “…classical liberal ‘negative’ rights do not conflict with each other, whereas ‘positive’ rights to be provided with things produce many conflicts. If my ‘right to health care’ conflicts with a doctor’s ‘right to liberty,’ which one wins out?”
Continuing with Ann’s article, she says values conflict with one another, though that’s only if true if one believes in positive rights.
I started this post with a discussion of values, because at the core that’s what we’re talking about. Values are relative, individual, and often in conflict with one another. And they define how we rank our choices between human rights. Dan values freedom, perhaps above most else. He might argue that economic freedom would lead to an enrichment of human rights at all levels, but he probably wouldn’t disagree that that thesis remains untested. My views are a little more complicated because I don’t get to enjoy the (albeit appealing and consistent) simplicity of libertarianism.
I’m tempted to say, “C’mon in, Ann, the water’s fine. Libertarianism is lots of fun.” To be a bit more serious, libertarianism is simple, but it’s not simplistic. You get to promote freedom and there’s no pressure to harass, oppress, or pester other people.
As my colleague David Boaz has stated, “You could say that you learn the essence of libertarianism — which is also the essence of civilization – in kindergarten: don’t hit other people, don’t take their stuff, keep your promises.”
The world would be a lot better if more people rallied to this non‐coercive system.
One more point. Dan mentioned he does “fully comply” with the “onerous demands imposed on [him] by the government.” But as Dan insinuates, irrespective of an individual’s personal values, those demands are not optional. In the United States, we have the luxury of electing a group of individuals to represent our collective values. Together those people make a vision for the country that reflects our ideals. And then, we all accept it. If our country got together and decided to value freedom above all else, we would live in a world that looks a lot like Dan’s utopia. But, frankly, it hasn’t. So we respect our tax code out of a respect for the vision of our country. Dan has the right to try to shape that vision, as do I. Neither of us has the right to violate it.
What Ann writes is true, but not persuasive. Libertarians don’t like untrammeled majoritarianism. We don’t think two wolves and a sheep should vote on what’s for lunch.
We like what our Founding Fathers devised, a constitutional republic where certain rights were inalienable and protected by the judicial system, regardless of whether 90 percent of voters want to curtail our freedoms.
Ann, as you can see from her final passage, does not agree.
That, at is heart, is my problem with both tax evasion and tax avoidance. Neither lines up with the spirit of our collective compact; although the latter is not necessarily reflected in the official laws on the books. I’m not saying tax avoiders should be thrown in jail; they’ve done nothing illegal. I’m saying the regulations that confine us should line up with the vision we’ve created and the values we’ve agreed upon. If that vision is Dan’s, I’ll accept it. But I’m glad he’ll (begrudgingly) accept ours too.
I’m not automatically against having a “collective compact.” After all, that’s one way of describing the American Constitution. But I will return to my point about America’s founders setting up that system precisely because they rejected majoritarianism.
So what does all this mean? Probably nothing, other than the less‐than‐remarkable revelation that Ann and I have different views on the legitimate role(s) of the federal government.
Since I want to restrain the size and scope of government (not only in America, but elsewhere in the world) and avert future Greek‐style fiscal nightmares, that means I want tax competition. And, to be truly effective, that means tax havens.
If that appeals to you (or at least seems like a reasonably hypothesis), I invite you to read some writings by Allister Heath of the United Kingdom and Pierre Bessard of Switzerland.
A few days ago, I explained why I'm a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and over-spend.
Tax havens play an important role in this liberalizing process, largely because they do not put themselves under any obligation to enforce the bad tax laws of other jurisdictions. They also use privacy laws to protect their sovereign control of what gets taxed inside their borders (this is what separates a "tax haven" from a more conventional low-tax jurisdiction). This means they are fiscal safe zones, particularly for people who want to protect their assets from the pervasive double taxation that exists in so many nations.
Not everybody agrees with my analysis (gee, what a surprise). To cite one example, the petty bureaucrats at the OECD got so agitated at me in 2009 (when I was offering advice to representatives of so-called tax havens while standing in a public lobby of a public hotel) that they threatened to have me thrown in a Mexican jail.
Now I have a new critic, though hopefully someone who would never consider thuggish tactics to suppress dissent. Ann Hollingshead writes for the Task Force on Financial Integrity and Economic Development, which (notwithstanding the name of the organization) seems to favor bigger government.
Anyhow, she wrote an article specifically criticizing my work on tax havens. So I figured it was time for a fisking, which means a point-by-point rebuttal. Here's how she begins, and I'll follow up her points with my responses.
Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”
No irony on my part. As I have openly stated, tax havens are a key part of tax competition, which is a necessary (though sadly not sufficient) process to restrain the greed of the political class.
Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States“could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.
Fair enough. We both recognize that the United States is a big tax haven. But we have different conclusions. I think it is unfortunate that only non-resident foreigners can benefit from these policies, while Ann wants to crack down on small low-tax jurisdictions such as Monaco, Bermuda, Liechtenstein, and the Cayman Islands, as well as big nations such as the United States. Sadly, Ann's side has somewhat prevailed, and many of the havens have agreed to become deputy tax collectors for nations with bad tax law.
So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.
I guess I should be happy that she holds out the possibility that I’m “relatively intelligent.”
I fight to preserve tax competition, fiscal sovereignty, and financial privacy for the simple reason that politicians are less likely to impose destructive tax policy if they know that labor and capital can escape to jurisdictions with more responsible fiscal climates.
My opponents in this battle are high-tax governments, statist international bureaucracies such as the Organisation for Economic Co-operation and Development (OECD), and left-wing pressure groups, all of which want to impose some sort of global tax cartel---sort of an "OPEC for politicians."
In my years of fighting this battle, I've has some strange experiences, most notably in 2008 when the OECD threatened to have me thrown in a Mexican jail for the supposed crime of standing in a public area of a hotel and advising representatives of low-tax jurisdictions on how best to resist fiscal imperialism.
A few other bizarre episodes occurred in Barbados, back when I was first getting involved in the issue. Here's a summary of that adventure.
I'm not a fan of international bureaucracies.
I've criticized the United Nations for wanting global taxes. I've condemned the International Monetary Fund for promoting bigger government. I've even excoriated the largely unknown Basel Committee on Banking Supervision for misguided regulations that contributed to the financial crisis.
But the worse international bureaucracy, at least when measured on a per-dollar-spent basis, has to be the Paris-based Organization for Economic Cooperation and Development.
OECD Headquarters: Living the good life at US expense[/caption]
American taxpayers finance nearly one-fourth of the OECD's budget, at a cost of more than $100 million per year, and in exchange we get a never-ending stream of bad policy recommendations.
This Center for Freedom and Prosperity study has all the gory details. The OECD bureaucrats (who get tax-free salaries, by the way) endorsed Obamacare, supported the failed stimulus, and are big advocates of a value-added tax for America.
What's especially frustrating is that the OECD initially was designed to be a relatively innocuous bureaucracy that focused on statistics. Indeed, it was even viewed as a free-market counterpart to the Soviet Bloc's Council for Mutual Economic Assistance.
My, how things change.
Perhaps the most odious example of bad OECD policy is the campaign against tax competition. Beginning during the 1990s, the OECD has attacked low-tax jurisdiction for the supposed crime of having good tax laws that attract jobs and capital from high-tax nations such as France and Greece.
So why did the OECD launch this project to prop up Europe's welfare states? The answer can be found in an excellent new study from Professor Andrew Morriss at the University of Alabama Law School and Lotta Moberg, a Ph.D student in economics at George Mason University.
I’ve been battling the Organization for Economic Cooperation for years, ever since the Paris‐based bureaucracy unveiled its “harmful tax competition” project in the late 1990s. Controlled by Europe’s high‐tax welfare states, the OECD wants to prop up the fiscal systems of nations such as Greece and France by hindering the flow of jobs and capital to low‐tax jurisdictions.
Guided by a radical theory know as Capital Export Neutrality, the OECD wants to impose global tax rules that would prevent taxpayers from ever having the ability to benefit from better tax law in other jurisdictions. This is why, for instance, the international bureaucrats are anxious to undermine national tax laws – such as America’s favorable treatment of bank deposits from overseas – that enable people to escape onerous tax regimes.
Bolstered by support from the Obama Administration, the OECD now is taking its campaign to the next level. At its Global Tax Forum in Bermuda, which ends later today, the bureaucrats unveiled a new scheme that effectively would result in the creation of something akin to a World Tax Organization.
The vehicle for this effort is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This may sound dry and technical, but the OECD wants all nations to participate in this pact, which has existed for a couple of decades but was radically expanded last year to give high‐tax governments sweeping new powers to impose bad tax law on income generated in low‐tax jurisdictions.
But the real smoking gun is that the OECD has put itself in charge of the “co‐ordinating body” that will have enormous powers to interpret the agreement, modify the pact, and resolve disputes – thus giving itself the ability to serve as judge, jury, and executioner.
This is a profoundly dangerous development with all sorts of very troubling implications. Since I’m in Bermuda trying to destabilize this effort, I don’t have time for extensive analysis, but here’s a press release from the Center for Freedom and Prosperity and here are some of my immediate concerns.
- Higher tax burdens. If high‐tax governments succeed is imposing this Multilateral Convention (insert “World Tax Organization” whenever you see that term), tax competition will be undermined and politicians will respond by increasing tax burdens. This is why nations such as France have been pushing this scheme, of course, and why left‐wing academics have long dreamed of this type of arrangement.
- Risk to human rights. Amazingly, the Multilateral Convention is open to repressive regimes, which then would have access to all sorts of sensitive and confidential taxpayer information. Already, the thuggish dictatorship of Azerbaijan has signed up, as well as the unstable nation of Moldova and the corrupt government of Mexico. The implications are grim, including the sale of private data to criminal gangs, the loss of sensitive information to hackers, and the direct misuse of American tax returns.
- Loss of sovereignty. For all intents and purposes, the Multilateral Convention outlaws certain pro‐growth tax policies and discourages others. Equally worrisome, it creates a system allowing foreign tax collectors to cross borders. The Obama Administration has specifically acquiesced to this provision, so perhaps we will soon see corrupt Mexican tax authorities harassing businesses and individuals on American soil.
- Outlawing tax avoidance. The OECD historically has tried to portray its efforts as a fight against tax evasion, but the Multilateral Convention explicitly talks about “combating tax avoidance.” This should not be a surprise since the Capital Export Neutrality ideology is based on the notion that taxpayers should have zero ability to lower their tax burdens. This means we can fully expect an assault on all forms of tax planning, with American companies almost sure to be among the first to be in the OECD’s crosshairs.
The final insult to injury is that American taxpayers are the biggest funders of the OECD, providing nearly one‐fourth of the bureaucracy’s bloated budget. So our tax dollars are being used by OECD bureaucrats (who receive tax‐free salaries!) to dream up new ways of increasing our tax burdens. In case you need any additional reasons to despise this bureaucracy, here’s a video detailing its anti‐free market activities.
And since I’m recycling some videos, here’s one explaining why tax competition is so important.
One of the biggest threats against global prosperity is the anti‐tax competition project of a Paris‐based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.
I’ve previously explained why the OECD is a problematic institution — especially since American taxpayers are forced to squander about $100 million per year to support the parasitic bureaucracy.
For all intents and purposes, high‐tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.
Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.
The Paris‐based Organization for Economic Cooperation and Development has an ongoing anti‐tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low‐tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high‐tax nations – particularly as more people understand that ever‐increasing fiscal burdens inevitably lead to Greek‐style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low‐tax jurisdictions should be especially resistant to new anti‐tax competition initiatives at the Bermuda Global Forum.
To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.
And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.
Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.