Friday, March 14, 2008

The "competitive advantage" of tax havens

Lord William Wallace of Saltaire, Deputy leader of Liberal Democrat peers in the U.K., has written to the Financial Times about the role of tax havens in the world economy. He says:

It is clear from the recent outraged correspondence that many successful businessmen and bankers feel entitled to live (at least for tax purposes) in the offshore world, while working in the onshore economy. This is the classic free-rider position: benefiting from the public goods provided by the onshore world while making little or no contribution to their provision.

Absolutely. And then he skewers the ridiculous claims by the tax haven proponents about how these countries "compete" successfully in the global economy.

Our global economy depends on the provision of a range of public goods: counter-terrorism, action against transnational crime and fraud, protection of sea lanes against piracy, the maintenance of a lawful and well-regulated international order. Larger states contribute disproportionately to the provision of such goods, as well as providing the domestic order, infrastructure and welfare that underpin market economies. Small states pay less; tax havens pay nothing. The “competitive advantage” of offshore financial centres rests on the willingness of larger states to tolerate their free-riding.

Well said Lord Wallace. We might, perhaps, quibble with one of his statements: that "tax havens pay nothing" towards global public goods. In fact, they pay less than nothing - they pay a negative amount - for they suck capital out from the states that are paying for those public goods, undermining their ability to pay for them.

But broadly his argument helps expose the great fallacy peddled by the supporters of tax havens: that market competition is good, therefore competition between tax havens must be good too. Plenty of people haven't thought too hard about this argument, and consequently swallow it whole. But it only takes a modest amount of intellectual exercise to understand the fallacy. The FT commentator Martin Wolf, in his book "Why Globalisation Works", put it like this:

The notion of the competitiveness of countries, on the model of the competitiveness of companies, is nonsense.

Quite so. As we have explained elsewhere, there are two kinds of competition: the good kind (such as between companies in free and fair markets to provide the best goods or services at the lowest cost) and the bad kind (such as between companies seeking to supply the highest bribe to win a contract.) The TJN website section on competition and co-operation says:
Think about it this way: when a company cannot compete, it goes bankrupt and another, hopefully better one, takes its place. For all the pain involved when firms go bust, this process does weed out bad firms and keeps others on their toes - and is a source of capitalism’s dynamism. However, if a country cannot “compete” – this is a route to becoming a failed state, an altogether less wholesome proposition. Poor countries are particularly vulnerable.

It is reassuring to see so much sense breaking out in world-class newspapers. Yet there is a lot of nonsense, too. It is also well worth reading Richard Murphy's recent blog on another set of letters in the FT: one from an outraged person who clearly feels entitled to live offshore but not pay for it, and the response from those pointing out those arguments as absurd.


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