 |
Around the World in 80 Ideas |
|
ECONOMIC POLICY 19: Fair tax competition! The role of tax havens in keeping taxes low The problem: the temptation to tax Governments seem to accumulate spending plans which are difficult to resist, and the cost of which seems to escalate faster than the economy can grow to sustain it. How can we give governments the discipline to resist the unlimited calls to put up spending and taxation ever further? The idea: stick up for tax havens Business flocks to countries which maintain low tax jurisdictions. With the rapid development of e-commerce, this trend is clearly accelerating. It is a welcome development since it encourages healthy competition in tax rates world-wide. If governments allow too great a differential between themselves and low-tax alternatives, capital, employment - and ultimately the power to tax - will be lost to them.
Lower taxes stimulate productivity and output by increasing incentives to save, invest and innovate. The Republic of Ireland is an excellent example: the adoption of attractively low corporate tax policies has transformed its economy. Whereas in 1970 Ireland's GNP per head was a mere 40 per cent of Germany's, in 1996 the comparative proportion had climbed to 79 per cent. Thirty years ago, many Irish people were obliged to emigrate to find work; now there are enough jobs in the Ireland for many of them to remain. In addition, the Republic's special tax regime, which applies to businesses trading in the International Financial Services Centre in Dublin and around Shannon airport, has proved a major success at attracting foreign investment. Low personal taxes for writers, artists, entertainers and sportsmen have also attracted the likes of Lisa Stansfield, the actor Jeremy Irons and the racing driver Damien Hill. Luxembourg is another good example of an onshore tax haven. It has a tradition of strict bank secrecy with no withholding taxes on interest payments to foreign savers. Its economy has prospered: the value of assets held in Luxembourg's banking sector totalled $93 billion in 1995, equivalent to 587 per cent of its GDP. This huge capital inflow has generated many well-paid jobs and the economy as a whole has thrived. Teachers, for example, are paid nearly twice as much as their counterparts in heavily taxed Belgium. Luxembourg's GNP per head amounted to $37,930 at purchasing power parity in 1995, 40 per cent ahead of its nearest rival, the United States. Many small countries and islands have realised that establishing themselves as tax havens is the key to economic success. In the Caribbean, leaving aside tourism, financial services is the main economic driver for an increasing number of islands such as the British Virgin Islands, and Barbados. Around Europe offshore centres such as the Channel Islands - Alderney, Guernsey and Jersey -the Isle of Man, the Portuguese island of Madeira, and Malta and Cyprus in the Mediterranean have also proved highly successful. Other jurisdictions with tax regimes that entrepreneurs in high-tax companies find attractive include, Belize, Dubai, Mauritius, Monaco, and the Seychelles. Tax havens such as the Channel Islands maintain rigorously high regulatory controls to deter money-laundering and other shady activities. Even so, they are not always successful, as many Russian mafia bosses and Columbian drug barons might testify (but won't). After the terrorist bombings of New York in September 2001, tax havens throughout the world have come under increasing pressure to be more diligent in the regulation of their accounts and more open to scrutiny, in the hope that this will prevent terrorist organizations being able to shelter cash in low-tax offshore centres. Assessment: too good to last? An analysis of the statistical evidence by Keith Marsden (1998) suggests that incomes rise more rapidly in countries that choose to compete by imposing lower taxes on business and individuals. Lower taxes are also associated with higher rates of growth for investment, employment, productivity, and private consumption. What is more, low taxes reduce poverty substantially. However, the European Union - which is a collection of predominantly high-cost and high-tax countries - has launched a major attack on tax havens, and indeed against lower-taxing countries even within the Union itself. In line with this, the Union has forced member states to agree to minimum (rather than maximum) rates of Value Added Tax and other duties, castigating some members for maintaining what is called 'unfair tax competition'. Thus in 199 a European Union ministerial committee on 'tax co-ordination' recommended a programme of action against tax havens (many of which are dependencies of the UK or other EU members) and low-tax countries. Singled out for criticism, for example, was the 10 per cent special corporation tax for manufacturers locating in the Republic of Ireland - the' Celtic tiger' that has led the EU growth league over the last decade. Surprisingly, the same battle has been joined by the OECD, which represents the world's leading developed countries. In most economic issues, the OECD is fully in favour of competition, but not, it seems, in the field of taxation. The government of Switzerland formally dissented from the OECD's report on 'harmful tax competition', pointing out that "a certain degree of competition in tax matters has positive effects. In particular, it discourages governments from adopting confiscatory regimes, which hamper entrepreneurial spirit and hurt the economy, and it avoids alignment of tax burdens at the highest level.' For further information:
|
Copyright 2002: Adam Smith Institute
Created and Maintained by: Cyberpoint Limited