Tax Havens: Myth vs. Fact
In recent years, so-called tax havens have been attacked by opponents of free trade and free markets. International bureaucrats and left-wing politicians accuse tax havens of everything from facilitating tax evasion and money laundering to precipitating financial instability. Such attacks are inaccurate and obscure the fact that tax havens promote economic growth, sound fiscal policy, and individual liberty. Below are common myths about tax havens and corresponding facts that advocates of economic freedom should have at their disposal:
MYTH: Tax havens are small island jurisdictions operating outside the laws and customs of the global system.
FACT: Some small islands are tax havens, but the United States, The United Kingdom, Switzerland, Hong Kong and several other industrial nations also qualify as tax havens because of their attractive tax laws and financial privacy for non-resident investors. In part because of “tax haven” policies, The United States attracts more than $10 trillion in foreign investment—a major impetus for economic growth.
MYTH: The anti-tax competition project of the Organization for Economic Cooperation and Development (OECD) is not a threat to the United States.
FACT: The OECD is seeking to create a precedent that jurisdictions do not have the sovereign right to maintain pro-growth tax laws. If it succeeds in its attack on smaller, less powerful jurisdictions, America’s freedom to adopt free-market tax reforms will be jeopardized. Moreover, the OECD already has recommended a plethora of taxes on the U.S., including a value added tax.
MYTH: Tax havens are a magnet for money laundering.
FACT: According to data compiled by the State Department, the CIA, the IRS, and the Financial Action Task Force, low-tax jurisdictions are less likely to engage in money laundering. This is likely due to the fact that revelations of illicit activity would be very damaging to the reputation of small economies, so there is a much greater incentive to weed out wrong-doing. Moreover, criminals tend to avoid taking stolen money offshore because cross-border transactions raise red flags and create paper trails.
MYTH: Tax havens encourage tax evasion.
FACT: Excessive tax burdens in welfare states such as France encourage tax evasion. This leads to capital flight to places such as Hong Kong, Switzerland, the United States, and the Cayman Islands. If French politicians do not like capital flight, they should lower France’s oppressive tax rates. Moreover, tax havens play a key role in protecting people victimized by crime, corruption, and ethnic or religious persecution precisely by shielding them from venal governments.
MYTH: High-tax jurisdictions are unable to compete with tax havens and therefore have little choice but to push for protectionist policies in order to retain entrepreneurial talent and capital.
FACT: High-tax jurisdictions can stay competitive by simply reforming their tax codes to make them more attractive to investors. Tax havens have played a critical role by encouraging dramatic tax rate reductions around the world in recent decades—reforms that have lowered global poverty and boosted economic growth.
For More Information:
May 2007, CF&P Foundation Prosperitas, “Tax Havens: Myth Versus Reality,” by Dan Mitchell