Tax havens are refuges for oppressed
BY J.D. TUCCILLE The Henry Hazlitt Foundation's Free-Market
Oct 13, 2002
Which country offers the best tax haven: the low-tax beaches of Bermuda or investment firms in the United States?
ANDY NEWMAN / Associated Press
WASHINGTON -- Congress and the Internal
Revenue Service have expended considerable effort in recent months in targeting overseas tax
havens. Too many Americans are evading their
fair share of the national tax burden, D.C. insiders say, by hiding money in offshore bank accounts and transferring their businesses to low-tax Bermuda.
"There's tremendous unity in the House that
dodging American taxes is un-American," huffed
Rep. Nancy L. Johnson, R-Conn. The European
Union shares American concerns about tax havens. To track down Europeans who hide money
overseas, E.U. officials tout a Savings Tax Directive that would mandate exchanges of information between nations about accounts held by
nonresidents. With the information in hand, tax
authorities could hunt
down funds cached
around the world.
Oddly, though, one of
the offending tax havens
targeted by the European Union is the United
States. How's that? Isn't
the U.S. government
dedicated to battling
outlaw nations that ally
themselves with tax
evaders? Well, it turns
out that "tax havens"
are in the eye of the beholder.
In a recent article
about the tax-haven controversy, Charles Adams, author of "For
Good and Evil," a history of taxation around
the world, defined a haven as "a kind of economic sanctuary, a modern city of refuge for
those oppressed by the fiscal laws of their
homeland." Adams compared the refuge offered
by tax havens to the sanctuary that Canada offered American draft resisters who opposed the
Vietnam War. Like those young men, modern
tax resisters flee something that they find oppressive -- in this case, government officials
with a taste for other people's money.
"The U.S. tax burden is dramatically lower
than that of the E.U., representing 29 percent of
GDP, compared with the E.U.'s 42 percent average," points out John Blundell, of Britain's Institute of Economic Affairs. This makes the United
States a tax haven relative to Europe. "Partly as
a consequence," says Blundell, "the record for
annual foreign investment into America -- a key
determinant of recent U.S. prosperity -- has
been broken on an almost monotonous basis."
Were American politicians to give in to European demands and snitch about money invested
in the relatively low-tax environment offered by
the United States, they'd be surrendering the
country's "tax-haven" status -- and the significant flow of investment capital that accompanies
that outlaw appellation.
The Cato Institute's Veronique de Rugy estimates the European Union's financial-information
scheme would drive at least $1 trillion out of the
United States, were it to be adopted. But tax-haven status is a relative thing, and a haven for
Europeans is still a hostile environment for
Americans who want to hold on to their earnings. The IRS digs through credit-card records
in search of offshore accounts and Congress denounces "corporate traitors" because many individuals and businesses based in the United
States consider paying domestic tax rates akin to
a mugging, and they do their best to hold on to
According to The Washington Post, "The United States, with its 35 percent corporate income
tax and its byzantine rules for taxing worldwide
profits, is not a particularly friendly tax environment." Europeans may disagree, but only because their own tax laws make even the U.S. tax
code look inviting.
As do corporations, individuals find benefits in
hiding income and investments in tax-friendly
environments. The growth of the Internet has
put tax havens at the disposal of average Americans as high rates and incomprehensible rules
have made such havens increasingly attractive.
Even Treasury Secretary Paul O'Neill conceded
that "our tax code is an abomination," though he
referred more to its complexity than to its appetite.
If the flight of people from financially oppressive governments is equivalent to similar escapes from politically oppressive regimes, then
crackdowns on tax havens take on a new and
troubling light. The European Union's Savings
Tax Directive and the IRS's pressure on banks
in the Caribbean start looking like the old Eastern Bloc's demands that West Germany surrender escapees to the authorities in East Berlin.
Rather than reduce their demands on their
subjects, as the rulers of Eastern Europe were
eventually forced to do, politicians in the United
States and around the world want to create a
worldwide financial regime that would leave no
place to hide from avaricious tax collectors. Of
course, such a cartel would succeed only if every single jurisdiction joined; but the current
flow of European money to America, and U.S.
funds to the Caribbean, give a foretaste of the
benefits to be enjoyed by holdout nations.
"When governments tax too much, there is an
iron law of history, that taxpayers will respond
in some direction for relief," says Charles Adams. Such relief takes many forms, including
fraud, flight and even violence. Throughout history, people have proven exceedingly talented at
resisting excessive taxation.
In fact, governments that cut taxes have often
found that money re-emerges from hiding places, and that people prefer the security of transactions conducted at home, in the open, so long
as the state's take isn't too large. In a classic
example, vast funds returned to the United
States "aboveground" economy when tax rates
were lowered in the early 1980s.
If politicians really want money and businesses
to stay at home, they should curb their appetites, and let people keep their hard-earned cash.
J.D. Tuccille is a senior editor of The Henry Hazlitt Foundation's Free-Market, www.free-market.net.