Let's think about several countries: Andorra, Luxembourg, Monaco, Ireland, Hong Kong, Singapore, and Switzerland. What kind of a common denominator do these places share?
By the title of this post, you can probably guess the answer pretty accurately.
These countries are at the top of the list of so-called tax havens, which constitute the base of the offshore economy.
What exactly makes a country eligible to be called a tax haven?
According to the definition established by James R. Hines Jr. - an American economist specializing in the taxation policies - "tax havens are low-tax jurisdictions that offer businesses and individuals opportunities for tax avoidance." Those countries are usually home to a tiny percentage of the world's population while concentrating a significant part of the global income.
These places are particularly attractive for international investors and companies receiving significant profits, searching for possible ways to avoid returning part of them to the government. Tax havens allow foreigners to legally obtain their income or keep their assets without obeying the responsibility to give back a significant portion of them in taxes. These countries can be characterized by inner political stability and high governance and control. As Dharmapala and Hines concluded: "poorly governed countries, of which world has many, almost never become tax havens." This is mostly because foreign investors are much more likely to develop deeper trust towards a country with a thoroughly governed system than those struggling with internal problems.
It is essential to underscore that most of the tax havens are not entirely tax-free. They charge their residents taxes; however, the rate is much lower than in most countries. Also, not all tax havens are countries; some of them – like the Caymans, Bermuda, British Virgin Islands, or Macau – are regions strongly linked to other countries.
The statistics of tax dodging
At this point, you are probably trying to gauge millions of dollars flowing through the tax havens. This kind of estimations is, however, really challenging to perform. Resources documenting reliable data depicting the economy of tax havens are, in fact, meager.
Nonetheless, particular organizations specializing in this topic lead extensive research and social campaigns related to tax havens. As one of the UN Dispatch articles states: "according to the Tax Justice Network, multinational corporations are dodging about $500 billion in taxes each year". Moreover, approximately "between 21-32 trillion dollars of private wealth is held offshore."
Tax havens vs. society and economy
Tax havens are a hot topic for many discussions. There are generally two main viewpoints regarding this issue. The majority of right-wing libertarians live by the saying that "taxes are a theft." They tend to underscore that taxes are hindering the potential of the giant corporations and most opulent individuals.
However, tax evasion opponents tend to recommend them restating their life motto by quoting Oliver Wendell Holmes Jr.'s words that "taxes are what we pay for a civilized society." The vast majority of people treat tax havens as a nest of injustice, and the symbol conveying the lack of ethics.
For many people, the most significant sign of patriotism these days is something as simple as paying taxes. Taxation is essential for everybody to access the basic municipal infrastructure elements without paying for their own roads, hospitals, fire stations, etc.
Moreover, tax havens are terrifyingly effective in stifling sustainable development on a global scale. The UN has warned that without strengthening the taxation systems, it may be impossible to meet the Sustainable Development Goals by 2030. Powerful corporations and incredibly wealthy individuals are avoiding taxes, which they can afford, at the cost of the world's poorest people. Tax havens are significant factors fueling economic inequalities and restraining global efforts to fight poverty.
One of the biggest problems related to tax avoidance is a phenomenon called "tax competition" or "tax wars." Those terms describe the practices of entire cities, states, or even countries, turning to tax breaks, subsidies, and the decrease of taxes for the wealthiest individuals to attract them. Obviously, they need a way to compensate for alternative profits by raising the taxes for the poorest part of society. This is an incredibly perilous spiral making the inequality bloom every year.
Even looking at tax havens from a strictly economic point of view, observing their significant drawbacks is possible. Since their GDP per capita is inflated due to particular economic indicators, these places are prone to over-leverage, which is an ideal recipe for severe financial crises. The Greek Crisis is told to be one of the most flagship examples of this situation.
We shouldn't also forget that taxes are transfers within the economy. That simply means that lowering taxes for big corporations is a way of providing them with subsidies, which happens at the expense of public spending on infrastructure, healthcare system, education, and so much more.
To conclude
I believe that a just, well thought, and thoroughly planned taxation system is the answer to the issue of tax havens. However, the way of tackling it is significantly dependent on the attitudes and decisions of individuals. This is why we should all remember that sustainable, equitable development is not only possible, but, above all, a priority.
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