Mirror, mirror, on the wall,

which nations are the biggest havens of all?

If you asked financial professionals to list the world’s biggest “tax havens,” they would quickly identify some of the most obvious international financial centers. Switzerland would be on virtually every list, as would the Cayman Islands. Other logical choices would be Jersey and Luxembourg. 

But would anybody, if asked to list the world’s 10 biggest tax havens, put together a list that includes Germany, Japan and the United States?

Sounds absurd, but that’s precisely what the ideologues at the Tax Justice Network (TJN) asserted in the Financial Secrecy Index1 (FSI) released last November. They want readers to think that Germany (#8), Japan (#10), and the United States (#6) are bigger havens than Panama (#11), Bermuda (#14), Guernsey (#15), Barbados (#26), Liechtenstein (#33), and the Bahamas (#49).

To be fair, though, the methodological approach used in the FSI report is not wholly objectionable. The TJN is seeking to come up with a measure that combines both the degree to which a jurisdiction has “secrecy” laws and the extent to which that jurisdiction attracts global capital.

In other words, the TJN’s philosophical leanings are extreme and the organization obviously is motivated by a desire to hinder tax competition and fiscal sovereignty, but the FSI report provides an interesting way of seeing which so-called tax havens play the biggest role in the world economy.

Interestingly, the TJN doesn’t like identifying jurisdictions as “tax havens.” In its methodology supplement2, it complains about a “lack of clarity, consistency and objectivity in defining and identifying tax havens.” So it refers instead to “secrecy jurisdictions.” And what defines such a jurisdiction? The TJN created a “secrecy score” for 82 nations and territories based on 15 separate indicators (with Samoa, Vanuatu and Seychelles providing the most privacy and Sweden, Denmark and Spain the least).

For what it’s worth, I have a much simpler definition, though it would probably generate similar results. In a video I narrated on the Economic Case for Tax Havens3, I state that a tax haven is “any jurisdiction that satisfies two criteria: First, it has tax laws that are attractive to global investors and entrepreneurs. Second, it protects its fiscal sovereignty by choosing, in at least some cases, not to enforce the bad tax laws of other nations.”

And since a jurisdiction generally needs to provide privacy in order to protect investors from “the bad tax laws of other nations,” it’s easy to see how libertarians and statists can find common ground, at least on the narrow issue of identifying “tax havens” or “secrecy jurisdictions.”

This doesn’t mean that TJN’s report is without flaws. The presence of big “onshore” nations among the top 10 secrecy jurisdictions, for instance, deserves some scrutiny. It makes sense to include the United States because there are several attractive policies for global investors, including the non-taxation and non-reporting of certain types of capital income. Moreover, several states have very friendly incorporation laws.

But it’s a bit of a puzzle to see Germany and Japan near the top of the rankings. These nations are rarely, if ever, mentioned at international conferences for offshore investors. In addition, there is little, if any, advertising from the types of service providers and financial professionals that cater to tax-sensitive clients. This calls into question the quality of the methodology.

Perhaps the problem is that not all of the 15 indicators make sense. The 9th measure is entitled “avoids promoting tax evasion,” which sounds like it might have something to do with being a tax haven or secrecy jurisdiction. But if you read the details, the TJN is basically complaining that an “exemption” or “territorial” tax system is bad because nations are more likely to compete by lowering tax rates.

Given TJN’s ideological bias in favor of high tax rates and double taxation, it is understandable that it instead prefers worldwide taxation. But the FSI report is supposed to be about the kinds of “secrecy” that might facilitate evasion. A territorial tax system, however, is not based on privacy and it is not a form of evasion.

Shifting to another potential problem, the 11th measure is “anti-money laundering.” Since such laws and regulations require financial institutions to spy on their customers, it is certainly the case that they undermine privacy and preclude secrecy. Yet not only have anti-money laundering policies failed to impact underlying crime rates (which is why they ostensibly were imposed), they also do not seem to have much of a role to play in thwarting tax evasion. Crooks, we should remember, are trying to bring illicit funds into the above-ground, taxable economy.

But I do not want to spend much time nit-picking about TJN’s indicators. The real debate is over fiscal policy and the power of government, not how to define tax havens or secrecy jurisdictions. Simply stated, TJN is opposed to tax competition, fiscal sovereignty and financial privacy because it wants bigger government, more redistribution and higher tax rates. As such, it favors all of the onerous rules that high-tax governments and international bureaucracies are trying to impose on low-tax jurisdictions. Indeed, TJN generally complains that these efforts do not go far enough.

Advocates of pro-growth fiscal policy, by contrast, want to constrain the power of the state. They see fiscal sovereignty and financial privacy as beneficial since those features enhance tax competition, which is needed to curtail the natural tendencies of politicians to over-tax and over-spend. Moreover, fiscal rivalry discourages governments from imposing high tax rates and punitive double taxation, thus helping to minimize some of the most damaging features of tax policy in many nations.

In this sense, the Financial Secrecy Index is a helpful publication for both sides. Notwithstanding some quibbles about certain indicators, the overall methodology is quite reasonable. And the resulting list gives statists a target list of nations and territories to criticize, but that same list also is a guide for investors and entrepreneurs of the jurisdictions that presumably welcome global investment.

At the risk of saying something nice about a statist group, the Financial Secrecy Index is one of TJN’s better publications. The FSI report is far more credible, for instance, than The Price of Offshore Revisited4, which made absurd claims about the amount of wealth in tax havens and the magnitude of supposed tax evasion. That publication was subsequently (and thoroughly) debunked5, so it is understandable that all TJN products are treated with skepticism.

 

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Daniel J. Mitchell

Daniel J. Mitchell specialises in fiscal policy issues. He also is a co-founder of the Center for Freedom and Prosperity, an organisation created to preserve and protect tax competition, fiscal sovereignty, and financial privacy.

As a member of the Editorial Board of the Cayman Financial Review, Daniel’s biography can be seen on the Editorial Board details page.

Daniel J. Mitchell
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