One of the effects of the Global Financial Crisis is that the window of ideas now regarded as thinkable has expanded greatly. Willem Buiter typically works close to the edge of the window, but even so, I doubt that he would have written this in the Financial Times a year ago:
[Tax havens] should be closed down.
The easiest way to achieve this is to make it illegal for any natural or legal person from a non-tax haven country to do business with or enter into transactions with any natural or legal person in a tax haven. That ought to do it. Tax haven, again, is defined not with respect to tax rates or tax bases, but with respect to bank secrecy, that is, with respect to the information shared by the country’s financial institutions with foreign tax authorities. That information sharing should be automatic and comprehensive.
As regards regulatory havens, once common G20 standards for regulatory norms, rules and regulations has been set, countries that violate these standards would be black-listed. The obvious sanction is non-recognition of contracts drawn up in the regulatory haven jurisdiction and non-recognition of court decisions in these regulatory havens. That ought to do it.
The logic hasn’t changed in the last year, but the idea that the OECD could simply cut off economic interactions with places like the Cayman Islands and Liechtenstein (let alone, say, Switzerland) wasn’t thinkable then. It is now.
Update Marshall McLuhan moment: In comments, Willem Buiter points to this piece, written a year ago, and taking an equally strong line. Despite getting this example wrong, I still think the window has shifted.
BTW, Ayn Rand fans should really welcome this proposal. They can settle their bills with their statist governments, then set up Galt Gulch in the Caymans (or wherever). Then they can let economic dynamism do its work there while they wait to return in triumph to the collapsed economies they left.
{ 34 comments }
Tom T. 03.31.09 at 2:18 am
How would this be different from the US embargo of Cuba?
Justin 03.31.09 at 3:15 am
“It would have a point” seems like a good start.
David Moles 03.31.09 at 3:54 am
And there would be a simple and clear condition for ending it that wouldn’t involve expropriating everybody and handing the country over to the Miami mafia.
David Wright 03.31.09 at 5:19 am
Tom T: The left likes Cuba. The left dislikes rich people. That’s the difference.
Cryptic Ned 03.31.09 at 5:36 am
This thread is already idiotic.
Resolved: Cuba is basically a tax haven for poor people. Yea or nay?
John Quiggin 03.31.09 at 5:39 am
Certainly, opening the window seems to have left some people a bit unhinged.
A. Y. Mous 03.31.09 at 7:48 am
Indulging in non-indulgence. The maximum any collection of agents can ever manage to achieve. A good idea nevertheless.
Paul S 03.31.09 at 8:37 am
The idea that closing secrecy jurisdictions is like a US embargo on Cuba would be funny…except it is truly depressing what amazing, devious and trickery depths people will sink to in order to defend the notion that only little people should pay tax.
otto 03.31.09 at 9:44 am
“The easiest way to achieve this is to make it illegal for any natural or legal person from a non-tax haven country to do business with or enter into transactions with any natural or legal person in a tax haven. ”
Well, this is a method for dealing with international externalities alright — savage unilateral punishments for not following rules which those subject to them have not agreed to or been compensated for adhering to. There are of course lots of other international externalities which the self-interested policies of other countries create, for example the invasion of other countries contrary to the UN use of force regime, but I think it unlikely that they will receive the same treatment. Furthermore, if US litigation/internal politics/state regulators etc prevents complete international exchange of information on taxes, as no doubt it will, no one would pull the trigger on the Buiter-ordained sanctions, or indeed any sanctions at all.
Yes, it’s fun to pick on those shady places for shady people. But this version just appears to be a call for an OECD-power play in international politics, and should not be dressed up as anything else, unless appropriate measures of agreement and compensation are part of the deal.
Pete 03.31.09 at 10:25 am
Hang on, doesn’t that just open up another layer of countries which are not themselves tax havens but have not effectively prohibited dealing with tax havens?
Also, are we in favour of “automatic” information sharing now?
Mike 03.31.09 at 11:37 am
savage unilateral punishments for not following rules which those subject to them have not agreed to or been compensated for adhering to
My heart is bleeding all over the floor.
Tom T. 03.31.09 at 12:49 pm
OK, let me be more explicit. How would this be more effective than the US embargo of Cuba?
Marc 03.31.09 at 12:50 pm
Old school Marxists extend their condolences to the members of the cult of the oligarchs. It can be difficult to have your God fail, but you can come out stronger on the other end.
Bloix 03.31.09 at 1:01 pm
“make it illegal for any natural or legal person from a non-tax haven country to do business with or enter into transactions with any natural or legal person in a tax haven”
I don’t think you’d have to go nearly that far. Suppose you passed a law that no entity claiming to be a corporation formed under the laws of, or having its principal place of business in, a tax haven, would be recognized as a corporation? That is, the legal fiction of corporate existence would not be granted to such entities. No contract entered into by such an entity would be recognized; it would not be permitted to sue or be sued in the courts of other countries, and judgments in its favor from its own country could not be enforced elsewhere.
People in the tax havens could continue to do business with the outside, but only as individuals or partnerships. There would be no restrictions on travel, tourism, shipping, or trade. Wouldn’t that do it?
Tracy W 03.31.09 at 1:08 pm
The easiest way to achieve this is to make it illegal for any natural or legal person from a non-tax haven country to do business with or enter into transactions with any natural or legal person in a tax haven.
This may be easy in terms of writing a law, but it suggests all sorts of problems elsewhere.
Say Switzerland is covered by this rule. Switzerland is in the middle of Europe and supplies a good deal of electricity to Italy, I think mostly from through France (you can’t actually directly measure these things). How would Italy and France’s transmisison system operators cope without being able to enter into any transactions with anyone at the Swiss system operator?
How about coordinating on reducing fishing (which sounds essential to saving many fish species) with island tax havens? (Or indeed any tax haven with a sea coast). While I’m thinking about islands, how about at-sea rescues?
How about pollution, either sea or air, that spreads across national borders?
How about tracking criminals? Sounds like a boon for smugglers, thieves, terrorists, etc, living close to a border. No matter how law-abiding the police are in the tax haven, presumably they won’t be able to hand the criminal over to the police of the offended country as that would involve a transaction between natural persons, and the tax haven police would face some practical difficulties collecting evidence for their own prosecution if no one in the other country can cooperate.
Cutting off all relationships with neighbouring countries is not easy.
richard 03.31.09 at 1:15 pm
I believe John’s point is not that this might be a workable solution to bringing about a uniform set of international finance laws without loopholes (I think we can agree it has clear problems). His point was that the discussion has been opened: this sort of thing was “unthinkable” a year ago: having just been brought into the realm of the thinkable, it would obviously need some thinking about.
Willem Buiter 03.31.09 at 1:18 pm
Re: “Willem Buiter typically works close to the edge of the window, but even so, I doubt that he would have written this in the Financial Times a year ago:…”
Your doubt is misplaced. See:
http://blogs.ft.com/maverecon/2008/02/blockade-the-tax-havens/
politicalfootball 03.31.09 at 1:57 pm
In other news, Marshall McLuhan says you really don’t understand his work at all.
I’m guessing that what John Q really meant is that he wouldn’t have noticed it had this been written a year ago. Thus, the Overton Window moves.
David Weman 03.31.09 at 2:33 pm
“OK, let me be more explicit. How would this be more effective than the US embargo of Cuba?”
Because it wouldn’t be unilateral? Because more these countries aren’t leninist dictatorships that can ignore the fallout?
Zamfir 03.31.09 at 3:03 pm
End yet, she moves…
P O'Neill 03.31.09 at 3:25 pm
Not a word in Buiter’s proposal about the huge dodge represented by tax concepts of residence and domicile. You could shut down every tax haven and the scope for tax avoidance would still be massive. How about every country adopting the US principle that citizens and residents are taxed at home based on their worldwide income, no matter where they live?
Gary Franceschini 03.31.09 at 3:36 pm
“How about every country adopting the US principle that citizens and residents are taxed at home based on their worldwide income, no matter where they live?”
It’s not quite so clear cut. Americans can exclude roughly the first $100K of their income from being taxable. There’s a lot of careful accounting that occurs amongst US nationals abroad to avoid paying anything at all to the IRS.
Anthony 03.31.09 at 3:38 pm
How functional would the OECD be if it cut off economic interactions with the U.S. and the UK? They offer all the benefits of traditional tax havens, as do many other OECD countries.
Martin Bento 03.31.09 at 4:41 pm
P.O., how about the US conform to the rest of the world instead of vice versa? If I live in France I’m going to call Brazilian police if I get robbed, I’m going to use Brazilian roads, I really should pay Brazilian taxes. Having to pay *both* Brazilian and US taxes is burdensome and unfair, but it is the US taxes that should go, as I will get little in services from the US government. In essence, the US is penalizing its citizens for leaving, which puts “love it or leave it” in a different light. In fact, I will defend tax havens until this is changed.
Gary, are you sure? I was under the impression that exemption had recently been revoked.
Martin Bento 03.31.09 at 4:42 pm
I changed my example from France to Brazil and neglected the change at one point. Example doesn’t matter, but please read as consistent.
otto 03.31.09 at 4:49 pm
“How about every country adopting the US principle that citizens and residents are taxed at home based on their worldwide income, no matter where they live?”
Have you any idea what a logistical nightmare this is for Americans living abroad, even if – after the allowances and double taxation treatment – they end up being liable for little tax?
David Moles 03.31.09 at 6:18 pm
Yeah, it takes me anywhere up to six hours a year to plug the numbers into TurboTax.
Dirty Davey 03.31.09 at 6:31 pm
“I’m going to use Brazilian roads, I really should pay Brazilian taxes. Having to pay both Brazilian and US taxes is burdensome and unfair, but it is the US taxes that should go, as I will get little in services from the US government.”
Require the taxes from Americans, but have a US tax credit for taxes paid to the Brazilian gov’t, one-to-one. If the other country is charging reasonable or high taxes, you don’t get double-taxed, but if the other country is a tax dodge it doesn’t get you out of paying in the US.
(This is basically the rule North Carolina has for “use tax”, that is, sales tax on out-of-state purchases. You get a 1-1 credit for sales tax paid in another state, so you legally only owe the full tax if you purchased without paying ANY tax.)
P O'Neill 03.31.09 at 7:50 pm
I’ll believe that Gordon Brown wants to shut down tax havens when he shuts down the non-dom category of taxpayer.
Martin Bento 03.31.09 at 8:02 pm
dirty davey, maybe I could go for that. I’d have to give it some thought.
Mike 03.31.09 at 9:04 pm
Currently, the reciprocal tax exclusion arrangement between the US and the UK excludes the first approximately $80K earned in the UK from US tax. Interest, dividends, etc., earned in the US are still subject to tax (of course, unless one is earning a lot of taxable interest in the US, this generally falls within the deduction limit, and so is also excluded).
And that whole non-dom thing does seem to have quietly slipped off the radar since it was first broached and all those invaluable rich people threatened to leave if they actually had to pay any tax. To which I say, fine, go; it means Dragon’s Den and The Apprentice will be cancelled in short order, which can only be a good thing.
otto 03.31.09 at 9:22 pm
“Yeah, it takes me anywhere up to six hours a year to plug the numbers into TurboTax”
To do your US taxes as an American, yes? Or to do your US taxes as a resident in the UK? The essential problem is that the decisions you would make to be tax efficient in the UK tend not to be the same as those you would take in the US, because of course different activities are taxed differently, so that questions of pensions and various investments become very complicated indeed.
John Quiggin 03.31.09 at 10:33 pm
P O’Neill, I haven’t followed the non-dom issue at all, but a 30k stg fee sounds like a good start. In general, I’m hoping for precisely this kind of ratchet effect – pressure to clean up tax havens leading to scrutiny of “legitimate tax avoidance” and so on.
L2P 04.02.09 at 2:43 am
“The essential problem is that the decisions you would make to be tax efficient in the UK tend not to be the same as those you would take in the US, because of course different activities are taxed differently, so that questions of pensions and various investments become very complicated indeed.”
Figuring out your taxes and planning my most effective tax avoidance schemes are two entirely different things. It’s not much of a burden for the average person to figure out their non-residence taxes. I get taxed in twenty different jurisdictions – not complicated at all. Trying to figure out whether it’d be a slightly lower tax burden to shift French stocks to British bonds may be a pain, but then that’s my problem, isn’t it?
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