Tax havens are getting more popular
and useful
for
upper middle-class professionals.
By Daniel Altman
February 26, 2008
Secret bank accounts, millions of dollars paid to informers, governments at
each other's throats - the recent scandal involving German tycoons and their
supposedly tax-dodging accounts in Liechtenstein has supplied some juicy
intrigue. But behind the splashy headlines lies an economic story that may
surprise you.
There is no official way to define a tax haven, but Liechtenstein fits into
a class of countries that the governments of major economies have come to
dislike.
Tax
havens
have low or no tax rates for corporations,
and
they offer secret banking services and, in some cases,
and
they don't seem to mind too much if money-launderers and other undesirables
are among their clientele.
They are also becoming more prominent in the global economy, said Grace
Perez-Navarro, deputy-director of the Center for Tax Policy and
Administration at the Organization for Economic Cooperation and Development
in Paris.
"Are they more popular, more useful, more dangerous? They're probably all of
those things," she said. "Back in the day, when you didn't have the
Internet, you had people carrying suitcases on a Pan Am flight to a European
tax haven. Now all that's changed."
Tax havens are no longer just for the wealthiest or shadiest characters from
nearby nations, Perez-Navarro explained. Through electronic banking and
credit card programs, they have begun to appeal to upper-middle-class
professionals around the world.
Indeed, Liechtenstein isn't accused of sheltering gun-runners or terrorists
in the most recent scandal, just some wealthy, tax-dodging Germans - and, in
the latest news, some Britons as well. The German and British governments
paid huge sums for banking information, possibly stolen, that may reveal the
identities of those tax cheats.
Of course, those governments would prefer not to have to use backhanded
methods to track these folks down. They might like to see an end to tax
havens - no more revenue escaping their treasuries, and fewer
tax-haven-abetted corporate frauds like the ones perpetrated by Enron and
Parmalat. But would that really be in their best interests?
Perhaps not. One argument, a favorite of advocates of small government, is
that tax havens put pressure on other countries to keep tax rates low and
regulations light, in addition to starving the authorities of tax revenue
that would just be wasted. Another theory, which doesn't require a political
imperative, comes from Mihir Desai, a professor of business administration
at Harvard University: Tax havens may actually bring business to nearby
economies.
"The presence of a nearby tax haven can actually generate more activity in
the non-haven," he said. "The intuition is, 'Are you more likely to locate
in Germany if you know you can use a nearby tax haven to reduce the cost of
capital?' "
Cutting the cost of capital in a multinational company means, in part,
avoiding taxes on profits. One way is to buy and sell assets between
divisions. Certain "intangible" assets, like patents, don't have
well-defined prices. So, a company can set any prices it wants to siphon
money from one division to another, perhaps from a non-haven country to a
tax haven.
A recent paper co-written by Desai suggests that multinational firms do take
advantage of this economic symbiosis: Higher economic activity in a tax
haven is associated with higher activity in nearby non-haven countries.
Along the way, the tax havens themselves can get rich, Desai said, sometimes
even becoming talent centers for financial services and other industries
along the way, as Bermuda has. So why aren't there more of them?
One reason may be increasing returns to scale; one big tax haven is likely
to be more economically efficient than two small ones, according to Desai.
And not every little country, Perez-Navarro added, has the legal framework
that international investors and multinational companies seek.
Perez-Navarro said the OECD didn't want to put tax havens out of business,
just to pressure them into adopting more effective and transparent
regulations. As the case of Liechtenstein shows, however, sometimes peer
pressure may not be enough.
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