There are legitimate reasons to criticize tax havens but some of the attacks are unfounded and unfair.

Tax havens are rarely out of the news. Last week, the campaign group, The Tax
Justice Network, which urges policymakers to close tax havens, issued
its “Financial Secrecy Index”, with Switzerland in first place in its
hall of shame, followed by the Cayman Islands, Luxembourg, Hong Kong
and, perhaps bemusingly, the US in fifth place. (To view that report,
click here).

The TJN argues, for example, that tax havens – which, depending on
one’s viewpoint, are places providing a shelter for illicit money or
shelter for unpopular groups against rapacious regimes – should be
eradicated. For example, it argues that the tax information exchange
agreements that have been signed by many jurisdictions under OECD
principles are inadequate, because in many cases a country trying to
catch alleged tax evaders has to have sufficient suspicion about a
citizen stashing away money in another country to request information.
Also, regimes can stymie requests for data. The TJN also argues that
while people may have sometimes had a genuine excuse for using such
havens decades ago, few excuses exist today. (This requires the TJN to
ignore the very current issues such as kidnappings and extortion of
wealthy families in places such as Latin America).

This lobby group argues that it is in the mainstream of policy debate
and not biased against free enterprise and trade. I disagree with the
TJN’s self-description, although it is undeniably to TJN's credit that tax havens
have been put under pressure to explain their activities and also, where
necessary, to remove abuses. While I think that some tax havens would
go out of business if major countries adopted better, simpler and less
oppressive tax codes, other jurisdictions will still perform a valuable
service in a world of free capital and migration. A lot of what these
financial centers do has nothing to do with tax but financial security
and convenience.

Message the Tax Justice Network

Last week, I wrote an email to one of the moving spirits in the TJN,
John Christensen. He has had years of experience as an advisor to the
government of Jersey and today is a fierce critic of such places. I have
amended the content of my original email to expand and clarify key
points. I have not printed Christensen's response as it would be
inappropriate for his remarks, sent in a private message to me, to be
printed without his permission. However, if the TJN wishes to respond in
public, this publication would be very happy to do so.

John,

First of all, the idea that tax havens undermine democracy is, it
could be argued, based upon the idea that 51 per cent of voters, for
example, are entitled to grab much, if not all, of the wealth of the
unfortunate 49 per cent, and that therefore it is terrible that some
people, such as the affluent/rich, can avoid some of this tax by moving
their affairs offshore. This raises the serious point of political
philosophy over to whether even democracies should have unfettered
powers to confiscate citizens' wealth. (One is reminded of the 19^th
century writer Alexis de Tocqueville’s remark about the “tyranny of the
majority”). This is not just an extreme "libertarian" concern, in my
opinion.

Some people dislike tax havens since they create a partial barrier to
using tax to significantly redistribute wealth. It is an open issue,
though, whether this is a bad thing in every case. Do we really want a
situation where a government with a temporary majority can just grab
money without restraint? We have checks and balances in modern political
systems, and for good reason. The ability of people to move some money
out of the taxman's reach might be regarded as such a "check". Would the
TJN support the idea of banning people from emigrating abroad if they
happened to be in a highly remunerated job?

Tax competition

It is true that some free marketeers laud tax havens and low-tax
jurisdictions for acting as a bit of a brake on the potential for a sort
of Group of 20 global tax cartel (the CATO Institute, based in
Washington DC, makes this point). Tax competition is a "race to the
bottom" in the sense that all competition is a "race to the bottom" if
by "bottom" you mean lower taxes overall or lower prices for goods and
services. In a world of free movement of capital, people and firms will
want to locate in places where they keep rather more, than less, of
their wealth than otherwise. It is hard to see why this is necessarily
an evil or "distortion": it is economic liberty in action. Different
countries will always, if they are sovereign, want to cut or raise
taxes; does this mean that any country that cuts taxes below a global
average is "distorting" trade? This presumes there is some sort of ideal
"level playing field". Indeed, the argument that different tax rates
“distort” trade could justify a global, one-tax-regime approach. This is
not just unworkable but it is also a severe restraint on national
sovereignty and liberty. For example, if we go to the smaller scale
level, and imagine if, say, Bavaria in southern Germany is “distorting”
interior German trade by having a lower tax than, say, Saxony. Is Texas
“distorting” trade because it has no state income tax? Does Nevada
"distort" trade for the same reason? Hardly.

Secrecy and privacy

I am not sure about the secrecy issue as being key here in the
perpetuation of tax havens any longer, although Swiss secrecy laws,
dating in their modern form to 1934, remain a key source of controversy
and seem to be eroding since the UBS-US tax case of 2009. There may be
other regimes that need to clarify the proper boundaries between
unacceptable secrecy where criminal, questionably-sourced money is held
out of reach, and legitimate privacy. The difference between what is
secrecy (bad!) and privacy (good!) is not an easy one to judge. But
critics should not dismiss the legitimate need for people to protect
wealth from prying eyes; this is an important civil liberties issue, no
different from privacy of health records, for example. I note that the
TJN has generally scorned the argument that Swiss bank secrecy laws
have, for example, shielded money of certain persecuted groups from
attack. A certain level of cynicism on the TJN's part might be justified, it is true. But
the truth is also complicated. Before ripping up bank secrecy, we need
to be sure that legitimate protections are kept in place. As for regimes
such as the Cayman Islands, I would have thought that if, say, the US
was convinced person A had held illicit funds in the jurisdiction, it
could freeze any accounts.

A final issue; I have never quite grasped how it can be claimed that
offshore jurisdictions harm the world's poor, unless one adopts the
zero-sum argument that wealthy persons are somehow robbing the poor by
not paying more tax. If the wealthy acquired their wealth in a free
market without force or fraud, this is clearly not the case. To the
extent that this "tax havens rob the poor" argument has force, it only
holds when people using tax havens are, say, crooks and dictators hiding
ill-gotten gains, as in the suspected cases of Libya, Egypt, many a
Middle East fiefdom, Russian oligarchs, etc. (Let's not forget, by the
way, that many of the worst financial crimes of recent years, such as
the Madoff Ponzi scandal, happened in onshore locations under the noses
of big, supposedly all-powerful regulators).

Remember, the wealth that is put into these havens has to be invested
in assets somewhere, such as into bonds and stocks, so it should be
channelled into productive investments to earn a positive rate of
return. The money does not simply vanish into a hole where it is
not put to use and loses its value. What would be the point of that?

I agree there have been many problems and concerns about tax havens
in the past and that these places continue to need to improve in terms
of openness and accountability. But I find some of the language directed
against them to be extreme and frankly, unbalanced. I also cannot help
but feel that some of the attacks on offshore tax jurisdictions are part
of a wider counter-attack on global capitalism and free trade, and as
such, those who launch such attacks should be more open about their
ideological motivation.