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The true impact of tax havens

  • Published at 09:17 pm August 4th, 2019
The true impact of tax havens

Tax havens are not as harmful to the economy as one may think

Although many people demonize tax havens, alleging that people transfer part of their fortunes to these places to pay fewer taxes, these places may not be as bad for the economy as stated.

Critics have even stated that if it were not for these millionaire paradises, the 2008 financial crisis would have been less serious. Politicians and journalists claim that without these paradises, governments would not have had to make so many cuts and would result in everyone paying less tax.

However, this is a classic fear-mongering tactic used by incompetent politicians to shift the blame of their flawed policies on somebody else, while journalists sensationalize the impact of tax paradises to attract readers. 

But before arguing in favour of tax havens, let us first define what a tax haven is. 

A tax haven is basically a jurisdiction with low taxes, high legal security, and a high degree of protection of savers' privacy.

International investors and savers do not only demand low taxes, but also legal security -- to ensure that their assets are safe from any kind of robbery, nationalization, confiscation, corruption, or inflation. 

The Cayman Islands, Switzerland, Singapore, Hong Kong, Cyprus, Jersey, and Bermuda -- all of these jurisdictions that we recognize as tax havens are characterized by their high legal safety. Savers know that the government will not decide to take their money on a whim.

Unethical, but perfectly legal

Operating in tax havens is not illegal in itself. Appearing in the Paradise Papers or the Panama Papers does not necessarily mean someone has committed a crime.

In fact, most of the names on these lists are those of entirely innocent people. Singer Shakira, for example, uses tax havens to minimize her tax bills within the bounds of the law. Although this may seem more or less unethical, it is perfectly legal. 

Another very important detail is that tax havens are a refuge for millions of citizens who have had the misfortune of being born in authoritarian and unstable countries.

In many countries, the most basic human rights are not guaranteed. There also exist states where authoritarian governments arbitrarily decide who to repress or prosecute. 

Many investors do not seek protection just for the lower taxes, but they are also escaping political, ideological, and religious persecution. 

For example, political dissidents in Russia or Venezuela, or entrepreneurs that come from unstable countries like Zimbabwe or Belarus, can benefit from accessing jurisdictions that guarantee the safety of their assets. 

If it is an aberration for some states preventing their citizens from leaving the country such as North Korea, China, or soviet-era East Germany, then isn't it also unusual for states to prevent their citizens from taking their savings out of the country and depositing it in a more protective foreign jurisdiction?

More importantly, both the media and politicians greatly exaggerate the consequences that these tax havens have on economies.

Blown out of proportion

People have blamed tax havens for things such as third-world government budget cuts, inequality, and underdevelopment.

To refute this, let us take the case of Spain, which has a high average income but is plagued by many economic problems and has high taxes. Based on their own government data, Spain invested €40.91 billion overseas in 2016.

Of this, only €9.54 billion ended up in tax havens. 

Furthermore, the highest estimates place the world heritage of tax havens at about $7.6 trillion, which is a very small number. The truth is, tax havens can hardly be responsible for the big problems many critics say they are.

A closer look at Spain also reveals that in 2016, 87% of the Spanish investments -- a bit over $8 billion -- went to Ireland, the Netherlands, and Luxembourg because of their low tax rates and legal safety. 

In that same year, these three countries invested just over $12 billion in Spain, thus capitalizing the weak Spanish economy.

How much revenue do governments lose to tax havens?

One of the most common criticisms tax havens get is that if governments did not have such unfair competition, they would not have had to make budget cuts as a result of the 2008 financial crisis.

Let us again analyze the Spanish case since they suffered the most from the recession.

According to data by the Spanish Ministry of Economy, the investment accumulated in tax havens amounts to about $80bn per year.

If all that money had been accumulated in Spain instead of tax havens, Spain would have received approximately a meagre $1.2bn to $1.7bn as extra income -- about 0.1% of Spain’s GDP.

As per the highest estimates of the Tax Justice Network, which is the source that is usually used to denounce tax havens, about $200bn was lost -- barely 1% of all the tax revenues of the world’s governments.

In reality, tax havens are not to be blamed for the cuts, nor do they force us to pay more taxes or harm our economies. 

Ireland, for example, was poorer than Spain in 1980. Today, thanks to its low taxes, it is the second richest country in the Eurozone. 

In order to improve general welfare, what we need are more companies, not more incompetent politicians and haphazard public spending.

The problems faced by countries with economic difficulties do not come from tax havens, but from their politicians and ineffective policies.

SM Abrar Aowsaf is a freelance contributor. 

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