Raiding tax havens won’t solve our problems

The rich know how to evade taxes better than the middle class. After the Panama papers leak, this much should be clear even to the less well-informed. Every name plucked from the Panama bag, over-brimming with appalling news as it is, adds to the allure of Asian property and income anonymization schemes. Migrations towards the eastern tax havens didn’t start with Panama. It’s been ongoing for at least a decade, propped up by the Great Recession when it had transpired that the European commercial and bank secrets aren’t what they used to be, and that the United States can manhandle even Switzerland. A depth is lacking in the public discourse spurred by recent revelations.

Raiding tax havens won’t solve our problems

Almost nobody takes account of the fact that tax havens are home to very different kinds of entities. One such entity is felonious criminals whose income stems from the proceeds of criminal activity. That comprises politicians who have misappropriated funds at home and are stashing the spoils away from their voters’ sights as well as blind (and deaf) justice. They should be put behind the bars and their ill-gotten assets expropriated.

Then there’s people who shroud themselves in exotic islands’ anonymity to avoid undue levels of taxation. Mostly businessmen optimising their tax liability. This money, however, has been earned legally, and constitutes a reward for rendering services sought after, freely, by the buyer. I’m hard pressed to reserve much ire or righteous indignation for a widow who’s averse to paying a tax on death (inheritance tax) at home. No one’s happy to pay taxes or to pay more than one has to. And the rationale behind the use of tax havens by this latter group is both perfectly legal and legitimate in equal measure. It allows some people to shield themselves and a fraction of their property from mafia – whether illicit or state-organised. Still others use it to sort out issues to do with a spendthrift wife, iffy relatives or spoiled children.

I’m equally underwhelmed by the false impression that drives this disproportionate public attention behind tax havens. Europe in particular is rife with misusing ‘the war on tax havens’ to masquerade home-grown public policy failures, lack of structural reforms or the dysfunctional banking system. Once again, there’s this sentiment creeping in that all one needs, in order to solve the budget deficit and debt problems, is to milk a tax haven. This is misleading.

First, the rich are not rich enough for that and there’s too few of them too. Even ritually sacrificing the golden goose in the form of a 100% nationalisation of the rich’s property would fall abysmally short of so much as covering the public deficit or fixing countries’ ailing pension systems. In the year 2009 alone, the U.S. federal deficit reached $1.4 trillion. That was commensurate with 35 times the total estimated wealth of Bill Gates, the richest man on the planet, that year. Second, more taxes siphoned off from the rich doesn’t equal lower taxes on the rest or lower budget deficits and less debt. One doesn’t need venturing outside one’s home base for examples. In the sacrosanct name of consolidating public finances, Slovakia has, in the past 4 years, fleeced its businesses more than usual and the government receipts have gone up some €4.6bn, compared to 2012. Consequently, the country’s €3bn budget deficit in 2012 has transmogrified into a budget surplus. Just kidding. Despite the significant gains in the amount of tax collected, we’re still €2.6bn in deficit.

Some are ticked that those businessmen who are sufficiently rich can in fact avoid the clutches of the likes of Mugabe, Tsipras, Merkel, Orban, Putin, Meciar (the thuggish former Slovak PM) or Fico (his current doppelganger) by fleeing to a tax heaven. My idea of justice says that when someone has a broken leg, it doesn’t follow that we must go about breaking everybody else’s legs. Irrespective of personal feelings though, it’s clear that tax havens are here to stay. So long as tax abominations persist, so too will tax havens. Politicians aren’t about to proscribe them since they, too, indulge themselves in their grace. Sure enough, that doesn’t mean they won’t promise doing so to the electorate. The full heft of new tax burdens will inevitably befall the middle class who can ill-afford to hire an army of lawyers and financial advisors to protect their property by dint of either geographic relocations or loopholes unbeknownst even to the lawmaker. The truly rich can at a moment’s notice move to the other hemisphere. Why not make the existing tax abominations a little more bearable by bringing the effective tax rates on the rich closer to 10%? Many may then even return. The war on tax havens won’t bring about greater bang out of the public buck, i.e. a more effective public-service finance function, to be sure.

CapX, 26. may 2016

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