Tax Havens

David Cay Johnston:

In 1983 just 10 percent of America’s corporate profits were funneled through places that charge little or no corporate income tax; today more than 25 percent of profits go through tax havens. The Obama administration could tell the Caymans—now fifth in the world in bank deposits—to repeal its bank secrecy laws or be invaded; since the island nation’s total armed forces consists of about 300 police officers, it shouldn’t be hard for technicians and auditors, accompanied by a few Marines, to fly in and seize all the records. Bermuda, which relies on the Royal Navy for its military, could be next, and so on. Long before we get to Switzerland and Luxembourg, their governments should have gotten the message.

Balko:

I happen to think countries that offer secret banking and tax shelters serve an important function. Their value may not be as apparent to everyone in the U.S., but I’d imagine even a skeptic like Johnston might see things differently if he lived in a country where the government was more callous about how it appropriated its citizens’ possessions (which isn’t to say there’s nothing callous about taking money from taxpayers and, for example, using it to help failed financial houses pay out bonuses to their executives).

It’s also pretty arrogant to think the U.S. government should simply impose its own laws on the rest of the world, be it with military force or by restricting the ability of its own citizens to engage in voluntary trade with the citizens of other countries.

FLG has tons of doubloons stashed with the Swiss Banking Gnomes so this hits close to home. On a more serious note, I completely agree with the statement above.

Mr. Johnston was being facetious, but simultaneously revealing something very important about taxation. Taxation is the taking of money from citizens by the government with force. At the far end of the taxation regime, hidden behind the forms and BS like voluntary system, are guys with guns. Don't pay your taxes long enough and they will show up. I promise you. His humorous foreign policy proposal reveals in astonishing clarity that truth. The guys with guns now require the ability to go anywhere and everywhere on the planet.

It's too bad that banking secrecy has become a thing of the past in the United States. The teller at your bank is required to report any suspicious activity to the government without letting you know they are doing so. Your bank accounts are an open book to almost anybody who wants to see them. And all of this was in the name of stopping organized crime, then the drug war, now terrorism, when in truth the issue has always been about collecting taxes. So, not only are taxes backed up by force, but income taxes also require the complete removal of any and all financial privacy to enforce.

Jurisdictions that offer banking secrecy will always appeal to tax cheats, but there are two important things to note. First, as taxes go up the benefit from moving money offshore becomes larger. Lowering the legal tax rate lowers tax cheating. Second, as Mr. Balko notes, there are good reasons for allowing banking secrecy.

Obviously, taxes are a necessary evil. However, trying to close down offshore banking because some of our citizens use it to avoid paying taxes is a terrible idea. I realize people like the idea of government providing services and of using the tax code as a redistribution tool. However, it's not just taking from the rich and giving to the poor, it's doing so with a gun and by looking in their underwear drawer.