Post No.: 0426
The tax havens, or low-tax jurisdictions, that exist in the world today are all relatively small countries or territories, in terms of geography and population, for a reason – the world wouldn’t be as economically and civilisationally advanced as it is today if the majority of the world’s countries, and largest economies in particular, were tax havens. Tax havens are essentially free-riders of public goods, in the sense that if every country tried to behave like them then the world just wouldn’t function as well. Taxes pay for education, healthcare, defence and other public goods like flood barriers (which are becoming increasingly vital due to climate change), for example. If everybody tried to rely on somebody else to pay for a public good then it won’t sustain enough funding. Taxes invest in lots of R&D too, such as for the Moon landings and all the innovations involved that got filtered down to benefit for-profit corporations. People tend to be biased by focusing more on what they’re paying out in taxes (or for being a part of a union) while ignoring or diminishing the significance of what they’re receiving in return.
Every sovereign state needs at least some taxation to pay for governance (without a government they won’t be recognised as a sovereign state on the world stage and therefore cannot be party to trade and investment treaties), as well as for policing and defence, for instance. Some tax could be collected via government and municipality ‘council taxes’, utility bills, living costs, and from certain industries like energy and finance, for instance – but a tax haven could be income and/or corporation tax-free for foreign workers and/or corporations i.e. their strategy is to attract foreign workers and companies to work there. It’ll be a tax haven for foreigners, who’ll bring in return skills, expertise, investment and jobs.
On the face of it, this seems like a fair deal. But these skilled people got their skills and training in countries that publicly paid for their education, and possibly helped raise them to be healthy and productive citizens through their publicly-paid healthcare systems too. In other words, this tax haven has grabbed these benefits for free by leeching off those countries that invested in their people. This tax haven didn’t help raise them, educate them, ensure their good health or protect them via enforced laws that ensured civil order while they were growing up, yet lured them away with zero/low taxes once they finally finished school, college or university and became adults and ready to work and repay the country (via taxes, or entrepreneurship and local job creation) that invested all of these things into them (via public goods and services). Instead, they’re paying it to a leeching tax haven that didn’t invest in them at all. This is a prime example of the ‘brain drain problem’. (Braaains.) This problem isn’t limited to skilled people being enticed away to places with low taxes but also better opportunities, working conditions, higher wages or whatever – but the key is that the country that invested in the person doesn’t end up receiving the returns from those investments.
Let’s say there’s a female from the United Kingdom, who goes through a state-funded primary school (entitlement to primary education is considered a human right everywhere though), secondary school, further education and (at least partly subsidised) higher education. She’s incredibly bright but wouldn’t have reached her full potential without these state-funded services because her family isn’t that rich or would’ve been burdened by a privately-funded education. She also has complex health problems that require numerous hospital visits – her treatments are very expensive and perhaps she wouldn’t have survived beyond a certain age if it weren’t for the public health service in the country she was nurtured in, or her parents would’ve been placed in humongous debt for looking after her into adulthood. Her parents and siblings would’ve needed to make major sacrifices. She may have had to forgo a higher education altogether and get a job as soon as possible to try to help her family pay off these debts, which would’ve been a relatively low-skilled job for her having lower qualifications.
…But she’s okay – fit enough to travel and work abroad even – and she and her family aren’t in debt because of the national education and health service in the country she was raised in. She works in a few jobs and does pay her taxes here, but before she’s fully paid how much has been collectively invested in her by the country that helped raise her (plus interest), she’s lured to work and live in a place like Dubai in her prime. She may be able to now afford a decent privately-funded healthcare in this low-tax emirate, but she mustn’t forget what country, and its taxpayers, helped her to get to this opportunity and point.
Tax havens free-ride because it’s not reciprocal. Although simplified here – two non-tax havens could have highly-skilled expats going between them, whereas a tax haven doesn’t reciprocate with highly-skilled workers but lower-skilled ones because they don’t invest as much in their people.
Some football clubs feel this way – they raise someone through their own academies but if a player gets good, a bigger club will want to poach him/her. But the difference here is that the ‘feeder club’ will at least receive a transfer fee for selling the player. A tax haven doesn’t pay the country that raised the skilled worker anything at all!
Publicly subsidised services for education and health help to partially level out inequalities, maximise the talent pool available, and help the true talent socially mobilise to the top rather than just the born-privileged.
It’s the same with enticing corporations because (non-shell) corporations are, after all, made up of people, who were educated, protected and so forth. Corporations are in essence collective embodiments of all the skills and expertise of its founders and employees, and more because they take advantage of public infrastructure, markets, enforced contract laws and other things that help their businesses to start and grow too. No one ever makes it alone.
These skilled workers who work in or set up companies in these tax havens, from their own perspectives, highly likely won’t care about the global economic picture. But people who pay their taxes in the countries these people have been poached from should care because these tax havens have essentially stolen from them. So it’s not about blaming the migrants or expats per se but the free-riding tax havens. I personally believe that people should be able to work wherever they want and can; albeit if they did so specifically to avoid taxes then they’ll be free-riding moochers themselves. (Note that if a person isn’t monetarily gaining anything then they logically cannot be monetarily free-riding either, hence why, in this context, income taxes should be, and generally are only, payable proportional to one’s income.) It’s about these havens sponging off the publicly-funded education and care of countries, like the UK, who have helped their children and their families through collective tax-funded public spending. We may end up training a lot of programmers and engineers, thinking that this’ll be great for the UK’s future economy, and then they get poached by another country dangling the incentive of no income taxes to foreigners. Don’t invest in people, or restrict migration, however, then the world will be worse off overall.
So tax havens are the free-riders of the economic world, and that’s how they can appear economically successful in terms of their GDPs, especially for their size. They’re also global centres for money laundering and hiding the proceeds of crimes, and of course tax avoidance (legal) and evasion (illegal).
Not all tax havens are the same but many cannot afford their own equally extensive state-funded education systems because, well, they don’t collect enough taxes to fund them(!) And if no country in the world bothered with an extensive state-funded education system then there’d be so much under-developed talent thus the world would be overall poorer for it – we wouldn’t have the amount of highly-skilled and productive people, innovative technologies and creative works we globally have today. Who knows how much progress we’ve lost to date because so many people in poor countries have missed out on education? They could’ve found the cure for that disease you might suffer and die from in the future?!
It’s therefore naïve to believe that every country should therefore be a low-tax jurisdiction – it’d arguably be better if every country were a medium-tax jurisdiction. If everyone tried to be free-riders then it’d be like everyone trying to eat food cooked by someone else – but no one’s cooking! Everyone will be left hungrier. Everyone would become worse off individually and collectively. These current low-tax states only survive and thrive today precisely because they’re in the minority – the volume of leeches logically cannot outnumber the volume of hosts without global collapse. (Although not about tax havens – during economic crises, countries that don’t collect enough taxes have even required bailouts from other countries that do.)
Some argue that tax havens encourage tax competition – but you cannot beat 0%! Well you can offer net subsidies, but funded how?! You’re the CEO of a multinational corporation and there’s a place with a 1% corporation tax rate and another place with a 0% rate – where would you put your headquarters? And if a country like the USA or China tried 0% taxes too then they wouldn’t have two of the world’s most powerful economies (and militaries) because taxes pay for education, infrastructure and other things that help a real economy to prosper. They have political might on the world stage too. It’d therefore be foolish to partake in a ‘race to the bottom’. Of course taxes that are too high aren’t optimal, but zero is certainly way too low. High/mid-tax countries should always seek to be more effective and efficient with their public spending, but that applies to low-tax countries too.
So natural selection means that free-riders cannot be larger than their hosts, and that’s evident by the size and number of tax havens today, in terms of their real economies at least. Competitive pressures are still present across the non-tax-haven world because it’s always inescapable. Charles Darwin didn’t say that selection only occurs in some environments and not in others – theories in the language of science are universal, and this theory in particular can never be broken because it’s axiomatic i.e. if there’s arguably no survival pressure in an environment then logically that’s the survival pressure in that environment.
Not to say that the way everything is, is necessarily right or best but, in any area and at every level, you’ll understand why the world is exactly the way it is once you better understand everything. Here, most countries in the modern world are not tax havens because having strong governments and collecting taxes is, evidently, the overall fitter strategy.
There needs to be international cooperation to tackle international tax avoidance schemes and practices, but different countries, at some level, still do want to compete with each other. Competition and personally winning won’t necessarily mean that the world will win overall though (just like one nation could emerge victorious in the aftermath of a highly competitive nuclear war but this won’t mean that humankind overall will have won).
Woof. So tax havens, or low-tax jurisdictions, are essentially free-riders in this world. It’s the same with any individuals and corporations who use aggressive tax avoidance strategies. The higher-tax countries make up for the lower-tax countries, and the fair tax-payers make up for the unfair tax-avoiders. You may think they’re self-interestedly rational, smart, ‘good for them’ or ‘you’d do so too if you could’ but it’s clearly unsporting, and every country and person cannot be like them. Tax havens and tax dodgers are hardly paragons of economic independence – they free-ride off others.