As a student of the course of Public Economics here at Nova SBE one of our main topics of study so far has been Optimal Taxation. In short, this concept refers to the research and design of taxation systems that minimize economic distortions and inefficiencies for a certain amount of Fiscal Revenues the Government needs to collect.
Taking this into account, in this post it is argued that the design of an optimal taxation system needs to account for the existence of tax havens. In the following paragraphs I will explain why and how we can go about it.
WHY ACCOUNTING FOR TAX HAVENS
Taking the United States example, according to Congressional studies it is estimated that tax havens cost approximately $100 billion in tax revenues every year (the equivalent to almost 2% of this country’s GDP). And because the Government still needs its revenues, it will have to compensate this lower level of revenues either through higher taxes to the households and firms that pay their taxes, reduced public expenditure or increased public debt.
Moreover, all these costs that the existence of tax havens creates are not evenly distributed by the economic agents. In a recent paper by Baxandall, Field and Smith (2012) named Picking up the tab it is argued that it is average citizens and small businesses the ones that bear the higher share of the tax havens price for the economy, because they are less likely to use them (to do so requires the availability of large quantities of extra cash, and for businesses large legal and accounting departments and the need of foreign subsidiaries).
HOW TO MAKE TAXATION SYSTEMS OFFSHORE PROOF
It is important to note that while there is a worldwide demand for opportunities to engage in tax avoidance as The Economist puts it, there will be advantages incentives for countries e to establishing themselves as off-shores. In this sense, completely eradicating off-shores will be unlikely. Having said this, strategies to fight tax havens pass mainly by increasing reporting requirements, finding ways to enforce them, inducing penalties to discourage individuals and setting agreements with other nations for exchange of financial information.
One should bear in mind however that far from being clear cut, this is still a very controversial issue. An article from 2008 by Daniel J. Mitchell named Why Tax Havens Are a Blessing suggests that these play a crucial role in protecting people who may be subject to religious, ethnic, social, or racial persecution in tie home countries. Moreover, he argues that they are important also because they disincentive governments to impose tax rates that are too high. In fact, he says, US itself might be the worlds’ largest tax haven, since the Government generally does not tax interest and capital gains received by foreigners investing in America.
One thing we know, since off-shores are here to stay, the study of the optimal taxation system needs to account for this issue, needs to be made more and more “off-shore proof”.
Asset Protection Law Center. (s.d.). Obtido em 3 de April de 2013, de http://www.rjmintz.com/offshore-havens/fighting-the-lure-of-tax-havens/
Fund, I. M. (s.d.). imf.org. Obtido em 3 de April de 2013, de Statistics: http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=7&pr.y=6&sy=2008&ey=2017&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=GGR%2CGGR_NGDP&grp=0&a=
Mitchell, D. J. (s.d.). CATO Institute. Obtido em 3 de April de 2013, de http://www.cato.org/publications/commentary/why-tax-havens-are-blessing
Phineas Baxandall, A. C. (2013). Picking Up the Tab: Average Citizens and Small Businesses Pay the Price for Offshore Tax Havens. U.S PIRG. United States: U.S PIRG.