Even If You've Never Been to Grand Cayman, Tax Havens Are Great

I couldn't agree more with Daniel J. Mitchell's article in the March 18 edition of Foreign Policy. Calling for Liechtenstein and other countries popular with tax-o-phobic investors to implement systems to track (read: tax) foreign investment and reduce financial privacy. On face, it's probably pretty hard for the average American economist to justify tax-havens; nobody likes the big corporations that continually find loopholes to law and are able to avoid the taxes that we all so begrudgingly pay. But, we all indubitably benefit from those exceptions tax accountants make the big bucks discovering:

First, if you live in a developed country, your taxes are probably much lower today than they were 30 years ago, thanks in part to tax havens. In 1980, top personal income tax rates in OECD countries averaged more than 67 percent, and corporate rates that year averaged nearly 50 percent. To compound the damage, countries routinely imposed extra layers of tax on capital, including dividend taxes, capital gains taxes, inheritance taxes, and wealth taxes. These policies discouraged saving and investment, stifling economic growth and causing significant economic hardship.

Since the era of Ronald Reagan, personal tax rates are hovering just around an average of 40 percent, while corporations pay just 27 percent. Mitchell makes the point that it's not some kind of ideological struggle against taxation and governmental intervention, but an economical response to the globalization of the late 20th and 21st centuries. Basically, they figure they ought to have moderate tax rates and have corporations pay, instead of having incredibly steep rates that provide far more of an incentive to avoid taxation and embrace legal loopholes.

Another, probably more important reason, is that America is the largest tax-haven in the world, arguably:

The U.S. government generally does not tax interest and capital gains received by foreigners who invest in America. And since the IRS does not collect data on those payments, there is rarely any information to share with foreign tax collectors. Moreover, U.S. corporate structures, such as Delaware and Nevada companies, are excellent vehicles for foreigners to manage their investments. Thanks in part to these attractive policies, foreigners today have more than $12 trillion invested in the United States. Yet if Merkel's efforts are successful and all nations are saddled with the obligation to help enforce foreign tax laws, it is quite likely that a substantial share of that job-creating capital will flee the United States.