Are tax havens harmful for the society?

Are the tax havens harmful for the society?

Are the tax havens harmful for the society?

“Tax havens make us pay more taxes.” It is common to hear this type of phrase which refers to States that offer lower savings taxation. But, are the tax havens harmful for the citizens of developed countries? In this article we intend to analyze the following: 1) Are tax havens inextricably linked to money laundering? 2) Are the so-called “tax havens” harmful or beneficial for the society?

It is quite common to find articles such as “Your paradise is our hell“, which was published in the newspaper El País. It says, as a conclusion, that “your tax evasion is my unemployment”.

However, we should address this issue with prudence if we want to make a serious analysis. Accordingly, first we need to answer what a tax haven (TH) is: it is a territory (usually a State) which has much more lax tax laws (especially in regard to taxes levied on savings) than the rest of the globe. The logical consequence is that there is an attraction effect from tax havens over capital from countries with higher taxes.

We must distinguish between two clearly differentiated issues with respect to TH: firstly, the use as means of money laundering; secondly, the mere fact that they allow to pay less taxes to those who have deposited their savings there.

Money laundering and financing terrorism: high risk jurisdictions

Money laundering and financing terrorism: high risk jurisdictions

They are often associated with organizations that use them in order to legalize the benefits derived from their illicit activity or financing terrorism (money laundering). Furtheremore, such a statement is of dubious veracity. This is apparent from the following study conducted by the University of Basel, where it can be read that in their list of 30 countries associated with money laundering, there is only one tax haven: “Antigua and Barbuda”. Also it is interesting that in relation to the “banking secrecy” countries like USA, Germany, Japan, Canada and Austria are in the top 20 of the index drawn up by Financial Secrecy Index, far ahead of several tax havens.

However, regarding the main question of interest, do we really pay more taxes because of tax havens? In the words of the economist Dan Mitchellthe good thing about these jurisdictions is that they avoid that politicians in other countries raise taxes as much as they would normally do without this type of tax competition“. It is, in fact, the fear of flight which avoids the Finance Ministers to create a tax on deposits, or increase the income tax rates from 50% to 80% of the income… etc. For example, let’s say in Spain we had a salary of 1.500€ and we burdened with a personal income tax of 50% (750€ net), wouldn’t we accept to work in Switzerland for only 1.000€ and an applicable income tax of 10% (900€ net)? The example is obviously invented, it is only intended to illustrate how the fact that Russia (for example) tax less the capital than Spain, not only benefits the Russians and those who have deposited their money in that country, but it also benefits the Spaniards, Frenchs, Italians, etc. These countries and their citizens are being protected from their own States by having the chance to emigrate to countries where they are not required to pay as high of taxes as they would in their native homeland. That latent threat imposes certain prudence to rulers at the time of increasing so much tax burdens.

This brings us to the following reflection: without tax competition, what would prevent Governments from increasing income taxes up to 80%? We can conclude that, precisely, thanks to the possibility of escaping from our original tax system to another with lower tax burden that we have the power to dissuade States from increasing even more the taxes demanded to the citizens. Besides, several of the most developed countries have a stronger relationship with money laundering than tax havens.

Source| Cato Institute, LibremercadoFinancial Secrecy Index

More info| Diego Sánchez de la CruzInstituto Juan de MarianaDiego Sánchez de la Cruz (II)

Image| Impuestosblanqueo

In WLT| Are the Central Banks a free market institution? The public money monopoly, What is a Tax Haven?, Could lower tax rates increase tax revenue?


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Legal Intern at Garrigues

Double degree on Law and Business Administration at Pablo de Olavide University.

Participant in Moot Madrid 2014 on International Commercial Law and International Arbitration.

Erasmus Programme at Nicolaus Copernicus University (Torun, Poland).

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