Should Tax Havens Be Banned

In the run-up to the G20, there is lots of debate about tax havens. Everyone from Gordon Brown to Barack Obama is trying to ban them. There is a typcially thoughful piece by John Kay in the FT, and by my Bloomberg colleage Celestine Bohlen. My own view is that they are being picked on unfairly and made a scapehoat, a point I've been elaborating on in Moneyweek. Here's a taster....

Well, at least that is one thing cleared up. You might have imagined the credit crunch, and the sharp slowdown in the global economy, had something to do with the bursting of a credit bubble, lenders that ran out of control, and regulators and central bankers who turned out to be asleep at the wheel.
But no. It turns out it is all the fault of a few tiny state-lets such as Monaco, Liechtenstein and Andorra.
In the run up to the G20 summit to be held in Britain next month, prime ministers, chancellors and presidents have been launching blistering attack on the tax havens. “All jurisdictions must come within the rules,” the British Prime Minister Gordon Brown announced last week at a press conference in London with the German Chancellor Angela Merkel. “Standards that are being applied in some jurisdictions are too low. This is the beginning of the end of tax havens, and that is good news for everyone.”
The new U.S. President Barack Obama has set his sights just as squarely on the same target. He has promised to raise an additional $210 in taxes from American citizens and companies by cracking down the way money is pushed through offshore centres.
And there is plenty of evidence that the principalities and state-lets under attack are starting to buckle under the pressure. In the past month, Switzerland, Liechtenstein, Andorra and Monaco have all promised to change their banking laws. Territories such as Jersey and the Bahamas may not be far behind. Banking secrecy in the offshore industry is about to be consigned to history.
But hold on. There are two problems here. First, there is absolutely no evidence to suggest that the tax havens had any role in creating the financial crisis. And, in making them the scapegoat, we risk throwing away freedoms that we should all guard far more carefully.
Let’s start with the contention that offshore centres played a role in the credit crunch. So far, no one has been able to come up with a single shred of evidence to suggest why that might be so.
True, many of the sub-prime mortgages, off-balance sheet vehicles and derivatives contracts that played a role in the crisis may have been nominally offshore. But that is largely incidental. There is hardly a single complex deal struck anywhere in the world that doesn’t involve an offshore centre somewhere in the chain. It doesn’t follow that the use of tax havens created the crisis.
After all, the problems in the British banking industry were caused by lenders such as Northern Rock, Bradford & Bingley and HBOS completely abandoning prudent lending rules. It was buy-to-let mortgages in Leeds, and self-cert loans in Swansea, that caused the trouble – not debts run up by bankers in Jersey or brass-plate companies in the Cayman Islands. The problem was not that banks hid what they were doing. It was the regulators didn’t ask the right questions.
In reality, the politicians are playing two tricks with their attacks on the havens, both of them completely disreputable. They are creating a smokescreen designed to distract attention from the failures of the regulatory systems they created. And they are desperately looking for ways to shore up tax revenues that are starting to crumble as the recession bites.
There has been a long-running campaign to clamp down on tax havens. The Germans have led the way, with a series of bullying attacks on Liechtenstein, a favourite of wealthy Germans. Now Britain and the U.S., which are becoming high-tax countries as well, are joining the attacks.
And yet, the charges commonly levelled at the haven are entirely bogus.
For all the allegations about harbouring money launders and undermining global tax systems, we should remember that the havens in question, whilst they might not be full-blown nations, are sovereign entities. They are entitled to as much respect as any other small country.
So Germany, for example, has a perfect right to set whatever laws it likes for people living in Germany. If it wants to ban its citizens from holding accounts -- or setting up trusts and foundations -- in other countries, it can do so (and deal with the flight of people and capital that would certainly result). But it isn’t entitled to harass other countries into changing their laws – and neither is Britain or the U.S. If people want to put their money into a low-cost, low-tax country, that surely is their business.
There is no substance to the ludicrous charge, regularly peddled by campaigners against tax havens, that this is somehow ‘unfair’ tax competition. All competition is unfair. It is unfair that the Germans make terrific cars, causing all kinds of problems for everyone else’s auto industry. It is ‘unfair’ that the Italians make great suits, or the French terrific wine. Perhaps they should be stopped from doing that to make it easier for other countries. Absurd? Then why should Liechtenstein or Jersey be forced to close their financial-services industry?
Nor is there any evidence that they are used by money launders or terrorists any more than any other financial centre. Serious terrorists use everyday banks because they attract less attention. Third-world dictators will always find somewhere to park the odd billion.
In truth, the growth of the offshore industry has been driven by higher, more complex taxes in Europe and increasingly in the U.S. as well. Since becoming Chancellor more than a decade ago, Brown has turned one of the simplest tax systems in Europe into one of the most complicated. Obama is set on the same path in the U.S. Instead of picking on very small countries, Brown, Merkel and Obama would be better off using the G20 summit to start fixing their own.