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There's an excellent piece by Dan Mitchell in the WSJ on an unpopular case: the case for tax havens, prompted by the German government's purchase of information stolen from a Liechtenstein bank (followed, it now seems, by HMRC buying the same data). Here's an extract:The Paris-based Organization for Economic Cooperation and Development is trying to use the imbroglio to resuscitate its initiative against tax competition. Willem Buiter, a professor at the London School of Economics, is using the issue to push an even more radical agenda: the forcible annexation -- by nations like Austria and France, under some unknown authority -- of jurisdictions such as Liechtenstein, Andorra and Monaco.
At best, these crusades against tax havens are misguided. At worst, they are an effort to create a tax cartel for the benefit of high-tax nations. This OPEC for politicians would mean higher tax rates for everyone and bigger government.
Wealthy tax evaders may not be sympathetic figures, especially to those of us who meekly comply with the law. But low-tax jurisdictions serve a valuable role in the world economy. Simply stated, they keep other governments honest. Globalization makes it easier for labor and capital to cross national borders, forcing governments to improve tax policy to keep the geese with the golden eggs from flying away.
Tax competition first became a big issue following the Thatcher and Reagan tax cuts in the 1980s. Responding to the increased attractiveness of the U.K. and U.S. economies, every single industrialized nation has been forced to lower personal tax rates in an effort to stay competitive. The average top tax rate in the developed world has dropped from more than 67% in 1980 to barely 40% today.
The same thing is happening to corporate tax rates. Back in 1980, corporate tax rates averaged nearly 50%. Today, led by Ireland's 12.5% corporate tax, the average corporate rate in the industrialized world is less than 27%. As the World Bank explained in its recent "Paying Taxes" report, these lower rates create incentives for more investment, which leads to faster growth, more jobs, higher incomes and what Berlin seems to be most concerned about: better compliance.
...[T]he academic literature increasingly shows that excess taxation of capital income causes significant economic damage, largely because people have less incentive to set aside some of today's income to finance tomorrow's growth. High tax rates on saving and investment also cause inefficient tax-avoidance behavior.
The case for havens is a very difficult one to make politically, whatever the economics. But so, once, was the case for lower taxes, although now the evidence is so clear that all but the most economically illiterate accept that pressure should be downwards, not upwards, on taxes.
There's a danger that, in dealing with havens as being an inextricable part of the case for tax competition, the case for both is lost. But really, the only people who serve to gain from diminished tax competition are bureaucrats and politicians who want the ability to take ever-greater amounts of our money to spend on ever-less worthwhile schemes.