I'm Dan Mitchell of the Cato Institute,
here to narrate another Center for Freedom and Prosperity video.
Today's topic is why tax havens are good for the global economy.
We're talking about this issue because politicians,
especially those from high tax nations such as France and Germany,
are persecuting low-tax jurisdictions.
They don't like the fact that jobs and capital are shifting to places with better tax laws.
Working through international bureaucracies, such as the Organization for Economic Cooperation and Development,
the European Commission,
and the United Nations,
these politicians from high-tax nations are trying to shut down the havens
in hopes of propping up their uncompetitive fiscal systems
The OECD even put together a tax haven blacklist,
and threatened these jurisdictions with financial protectionism
if they didn't agree to become vassal tax collectors for bigger nations.
Some off-the-wall advocates of big government
have even urged military attacks against tax savings, if you can believe that.
In a previous video, we talked about the issue of tax competition,
which occurs when politicians feel pressure to improve tax policy
so the geese that laid the golden eggs won't fly away.
Ever since the Reagan and Thatcher tax-rate reductions began the process of tax competition,
nations have been racing the lower tax rates,
in hopes of attracting or retaining jobs and investment.
Top personal income tax rates in the developed world
have dropped by more than twenty five percentage points.
Corporate tax rates, meanwhile,
have plunged by twenty percentage points,
and there are now twenty five flat tax nations - an amazing development
No wonder the global economy is so much stronger today
than it was in the nineteen seventies.
Tax havens are good because they promote this tax competition.
But before getting into details
let's define what it means to be a haven.
According to stereotypes, tax havens are little islands in the Caribbean,
and indeed, some of the world's premier offshore centers are Caribbean Islands.
But to be more accurate,
a tax haven is any jurisdiction that satisfies two criteria.
First, it has tax laws that are attractive to global investors and entrepreneurs.
Second, it protects its fiscal sovereignty by choosing,
in at least some cases, not to enforce the bad tax laws of other nations.
So who are the havens?
The answer is gonna surprise you.
One of the world's leading experts on offshore issues, Marshall Langer,
wrote in Tax Notes International that the most important tax haven in the world is Manhattan
The second most important haven in the world is... London
the United States and United Kingdom are havens
because of attractive laws that enable foreigners to invest money
and then not have to report that income to their tax police.
That's good for the US and UK economies,
and it's good, of course, for the foreign taxpayers.
By some counts there are more than seventy tax havens in the world,
ranging from big nations like the United States
to obscure tiny jurisdictions such as Melilla,
which is an autonomous part of Spain on the coast of Morocco,
and Sark, a tiny British controlled island off the coast of France.
In some cases, such as America,
the tax haven policies are designed to attract global capital
and are only available to foreigners.
In other cases, such as the Bahamas,
the beneficial tax rules are open to everyone,
both residents and non-residents.
Let's run through quickly four reasons why tax havens are good for the global economy.
First and most important, they promote good policy around the world
by pressuring politicians and high-tax nations to lower tax rates.
We already saw how tax rates have been reduced and how a flat tax revolution is sweeping the globe.
These pro-growth changes are happening mostly because of tax competition,
and tax havens are very valuable in this regard
because politicians are less likely to be greedy
when they know taxpayers have escape options.
Remarkably, even OECD economists understand that tax competition
is a pro-growth force in the world economy.
They have admitted that “...the ability to choose the location of economic activity
offsets shortcoming in government budgeting processes,
limiting a tendency to spend and tax excessively.”
Another OECD study acknowledged that
“...decentralization can make governments more accountable...
It may also introduce competition across jurisdictions and thus raise public sector efficiency.”
These are astounding confessions,
since the OECD is the bureaucracy that is leading the attack against low-tax jurisdictions.
Tax havens have been especially helpful
in convincing politicians to reduce the double taxation of saving and investment.
Many nations have lowered or eliminated death taxes and wealth taxes,
because the politicians have finally figured out
that oppressive tax laws simply lead taxpayers to move their money to havens,
such as Luxembourg or Panama.
Likewise, nations have reduced the double taxation of dividends, interest, and capital gains.
The politicians figure it's better to have a low rate and collect some money,
rather than have a high rate
and drive investment somewhere such us Switzerland or Singapore.
As a German economist noted,
“the level of total taxation would indeed be higher
in a world without tax competition...
Financial assets such as bank accounts, bonds, or equity
are highly mobile and easy to relocate. ...
Tax competition has largely prevented [politicians] from tapping into this revenue source. ...
tax rates were cut practically everywhere.
From an economic perspective, these lower tax rates are critical
because they've reduced the tax bias against saving and investment.
This encourages people to set aside more of today's income to finance tomorrow's growth.
And even socialists agree that capital formation is the key long-run prosperity
and rising living standards.
Second, tax havens generate high living standards.
According to World Bank data,
nine of the world's thirteen richest jurisdictions are tax havens.
Academic researchers, not surprisingly,
have confirmed that tax havens grow faster and create more prosperity for people.
This is especially important in the developing world,
where poor nations that become tax havens
enjoy big increases and prosperity
and big reductions in poverty.
Third, tax havens promote better governance.
One of the problems plaguing poor nations
is the lack of sound institutions.
Property rights, the rule of law, and sound money
are the indispensable building blocks for wealth creation and economic growth.
Well, two academics found that the desire to become a tax haven
leads nations to improve their institutions, for the simple reason
that global investors don't want to place their money in poorly governed jurisdictions.
This is something that should be applauded, not persecuted.
Fourth, and this is especially interesting,
leading economists found that tax havens help high-tax nations enjoy more prosperity.
This seems like an odd finding, but it actually makes a lot of sense.
Most countries, even high-tax nations,
generally have more favorable tax rules for inbound investment.
This is because politicians figure their own citizens are captive customers and can be overtaxed,
but they understand that they have to compete for global investment,
so there are better rules for foreigners.
What happens, then, is that citizens from high-tax nations often
move their money to a neighboring tax haven;
They then pretend that they're foreigners and they use the haven as a platform
to invest back in their own country.
This additional investment in the high-tax country,
which otherwise would not have taken place,
increases its prosperity,
which is exactly what the professor's found in their study.
Let's close with a quote that captures the essence of the issue.
John Mcginnis, of Northwestern University Law School,
wrote that, “Jurisdictional competition among sovereign nations
is a primary mechanism
for empowering the encompassing interest of a nation
and reducing the ability of interest groups
the take resources from the government.
...Leaders are therefore restrained from rewarding themselves,
their supporters, or influential special interest groups.
I'm going to sign off now with my usual request.
Help the Center for Freedom and Prosperity by sharing this video with your friends and colleagues.
I'm Dan Mitchell, thank you for your time.