The Times has revealed that one third of British billionaires have moved to tax havens over the past decade. The same paper is also set to disclose the full list of British billionaires living offshore for tax purpose while also controlling British businesses, owning large amounts of land, and wielding political influence.
These revelations will obviously cause a great deal of concern. Why, after all, should somebody who is not resident in this country for tax purposes be able to influence public policy? Then there is the revenue the billionaires’ absence costs the Treasury, which puts pressure on public services, and leaves the shortfall to be made up by other taxpayers.
So, what actually is a tax haven and what should we do about them? Well, there is no accepted definition, but the OECD gives four criteria: the jurisdiction imposes no or only nominal taxes; there is a lack of transparency; a lack of effective exchange of information with other governments and no requirement that a taxpayer’s activity in the jurisdiction is “substantial”.
These terms are ambiguous and open to different interpretations. Some campaign groups have drawn up lists of what they consider to be tax havens, with countries and territories ranging from the Cayman Islands, all the way to the US state of Delaware. Given the fact that the US had one of the highest corporate income tax rates in the the developed world when that particular list was drawn up, it is difficult to take it too seriously. Too often it would appear that the term ‘tax haven’ is often thrown around and used as an insult, rather than in any reasonable or easy to understand way.
There are campaigners who say that the UK government should do more to abolish tax havens. However, as we have just seen, they are not easy to define and there is no broad consensus on what constitutes a tax haven. Calling for their abolition without defining what they are appears foolhardy at best.
There is also the obvious but often overlooked difficulty of the UK government demanding that another sovereign state changes its laws. Even the most diehard British jingoist would accept this is probably a step too far. And given that Delaware is in the firing line, caution might be advised before threatening the United States over its tax affairs.
Practicalities aside, just how concerned should we be about tax havens? The answer: not very. The vast majority of tax havens are not, as some people might like to imagine, being used for the purposes of tax evasion, or to hide the ill-gotten gains of gangsters. In fact, they play an incredibly important role in the global economy.
For example, James R Hines of the University of Michigan has identified five ways in which tax havens achieve this.
First, they stimulate foreign direct investment in high-tax countries. Levels of foreign direct investment in high-tax countries depend on the availability of financing structures that use offshore tax havens. This is especially true for less developed countries, as half of their inward investment comes via tax havens. If tax havens were suddenly abolished, a significant proportion of investment would never occur.
Second, they play a role in disciplining financial markets. Tax havens limit the extent to which large financial institutions can exploit local monopolies to the detriment of local businesses and individuals.
Third, they help to promote good governance. For example, tax havens often score very highly of the World Bank’s indicators of governance quality. This is important, as Hines points out, investors would not be prepared to devote significant resources to jurisdictions that are not well run.
Fourth, they promote tax competition between jurisdictions. This places pressure on politicians in countries with high levels of taxation to lower their tax rate and simplify their tax codes.
Fifth, they foster economic growth. Countries classed as tax havens have seen rapid and sustained economic growth over the past few years. As a result, the living standards of the people living in these countries have improved dramatically.
Tax havens are also a way to ensure that the entirety of one’s money is not confiscated based on the whim of the state, or that a person is not forced to keep their earnings inside that country.This is particularly important for ethnic minorities who might need to keep their money away from an oppressive government, or where people are operating in failed states.
Despite the many benefits brought about as a result of tax havens, there is still a sense of unfairness about it. It cannot be right that the wealthy can legally avoid paying what they owe in tax, while the rest of us do not have the means to do so. What should our government do to address this?
One of the main reasons why the very rich move their wealth offshore is due to high tax rates in this country. With taxes on income, profits, investments, property, and even death, the tax burden in the UK is at a 49-year high. If we want to stop this tax exodus we need to lower taxes on income and abolish taxes on investment.
The government also needs to simplify the system. We have a tax code that is both extremely long and bafflingly complex, to the extent that only very clever lawyers and accountants can hope to fully understand it. The very wealthy, of course, can afford to pay these people to find loopholes which reduce their tax bill.
The result is less money to be spent on essential public services and the burden being shifted to those who do not take advantage of the system. Rather than grandstanding about tax havens, the government would be best served removing the incentives to avoid tax by simplifying the system so no one can exploit these kind of loopholes.
Despite some of the hysteria, tax havens are not the preserve of crooks. In reality, they play an important role in the world economy. Nonetheless, if we want to make sure the rich pay their fair share of tax, the top priority will is to design a British tax system that is truly fit for purpose.