Foreign Policy Passport looks at the possible end of tax havens and recalls an argument in favor or preserving them. I've been turning this issue over in my mind ever since and finally posted a comment on the story.
Daniel Mitchell claims that tax havens are a good thing because they force governments in places like the U.S. and Germany to lower their tax rates, as if they don't capital will simply flee to a better place, like Monaco, Andorra, or the Cayman Islands. In other words, it creates competition. He cites the figure of $12 trillion of foreign investment in the United States as a result of this.
When I initially read this, it made me a little angry, but I was having trouble articulating just why. I made a goal of thinking through my opinion, and I'm open to alternative viewpoints.
It's obvious that this competition in tax rates is not really a fair one. The places that have become tax havens can afford to do so because they are small and their populations are rich, so there's little demand for government services. Can you blame Germany for wanting to base its tax policy on its own needs, rather than those of tiny European duchies?
On the other hand, what does it really mean when a business takes advantage of a tax haven? Are they really 'investing' in that country, or are they just paying it a nice fee to file their paperwork and keep their mouths shut? I don't really know the full answer to this question--it probably depends on how one is using the tax haven. But a hedge fund incorporated in the Caymans still takes full advantage of the infrastructure of the cities and states where it actually does most of its business, so again, I understand the anger toward the havens.
For me what all this comes down to is that Mitchell's real argument is that any way you can force tax rates down, no matter how illegitimate, is fine, because he'd rather have no taxes at all. Plenty of people do feel that way, but Mitchell doesn't really admit that this is his reasoning.
Comments (6)
Look, we elect people to set our rules and Mitchell's people want to live under a different set of rules. If the gov could collect monies owed, it would certainly put a dent in the deficit. But I fear making politicians be fiscally responsible is a losing battle-is it easier to run for reelection based on what you've done or what you didn't do in office?
March 9, 2009 11:46 PM
On the other hand, under obama's plan fewer middle class people will be paying taxes than ever; making it so there's less direct consequence of electing a tax & spender. This is to the disadvantage of the few taxpayers left in this country.
March 9, 2009 11:53 PM
I agree with your first comment, it is politically difficult to do this, but that doesn't mean it shouldn't be applauded.
I'm not sure where to start with your second comment. It seems to imply that the current state of affairs is that middle class people are paying less than their fair share of taxes, while the rich are paying their fair share or more. I know there's a lot more opinion than fact out there on that topic, and I'm open to being persuaded otherwise, but personally I don't believe this is the case. If the middle class are paying a smaller share of taxes than they used to perhaps it's because they have a smaller share of the income.
March 14, 2009 2:00 PM
Jay, its about a result of tax cuts and tax credits over the past several years, where 33 percent of American families paid *no* federal income tax in 2000, 38 percent paid none in 2008, and with the Obama changes, 44 percent will pay none for 2009. Thats a pretty astounding figure, dont you think? While it make sense to keep poor people off income tax rolls, removing a sizable proportion of the middle class weakens the political bond between taxpayer and government and will lead to pressure for more spending.
March 15, 2009 12:35 AM
Sure, those are alarming numbers. But I don't think it makes sense to judge them without some further context. How do you know that it's the middle class paying less? How do you know to what extent it's a result of changes in tax law versus changes in the distribution of income? I would like to find out for myself the answer to these questions, but it seems difficult to find unbiased information about it without becoming a full-time economist. If you have such sources I'd be happy to read them.
I do see your point about the taxpayer bond, but for all the bitter commentary lately, I think a tax hike at this point would be political suicide, and for good reason. Many conservatives like to say the tax cuts are the only true stimulus and that spending is a waste. So what would you recommend?
March 15, 2009 11:42 PM
ok, so i pilfered that stuff from an editorial in the Economist i was reading on the airplane (though I agree with it). i will go on to note that at some point higher taxes disincentives work/profit making, and actually results in lower overall government revenues.
sometimes resisting the urge to *do something* is the most effective course of action, though highly unpopular politically
i was thinking the other day that the Obama plan hurts new yorkers worst of all. Making 250k-plus in Kansas is filthy rich, but in Manhattan, much less so.
March 18, 2009 7:37 PM