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.