Paul L. Caron

Thursday, May 12, 2016

Mitchell:  The Necessary And Valuable Economic Role Of Tax Havens

Daniel J. Mitchell (Cato Institute), The Necessary and Valuable Economic Role of Tax Havens:

Economists certainly don’t speak with one voice, but there’s a general consensus on two principles of public finance that will lead to a more competitive and prosperous economy.

To be sure, some economists will say that high tax rates and more double taxation are nonetheless okay because they believe there is an “equity vs. efficiency” tradeoff and they are willing to sacrifice some prosperity in hopes of achieving more equality.

I disagree, mostly because there’s compelling evidence that this approach ultimately leads to less income for the poor, but this is a fair and honest debate. Both sides agree that lower rates and less double taxation will produce more growth (though they’ll disagree on how much growth) and both sides agree that a low-tax/faster-growth economy will produce more inequality (though they’ll disagree on whether the goal is to reduce inequality or reduce poverty).

Since I’m on the low-tax/faster-growth side of the debate, this is one of the reasons why I’m a big fan of tax competition and tax havens.

Simply stated, when politicians have to worry that jobs and investment can cross borders, they are less likely to impose higher tax rates and punitive levels of double taxation. Interestingly, even the statist bureaucrats at the Organization for Economic Cooperation and Development agree with me, writing that tax havens “may hamper the application of progressive tax rates.” They think that’s a bad thing, of course, but we both agree that tax competition means lower rates.

And look at what has happened to tax rates in the past few years. Now that politicians have undermined tax competition and weakened tax havens, tax rates are climbing.

So I was very surprised to see some economists signed a letter saying that so-called tax havens “serve no useful economic purpose.” ... [But] there’s a big list of Nobel Prize winners who recognize the economic consensus outlined at the beginning of this post and who understand a one-size-fits-all approach would undermine progress. ... [T]here is a very strong “economic purpose” and “economic justification” for tax havens and tax competition. ...

[W]e need tax havens and tax competition if we want reasonable fiscal systems. But this isn’t simply an issue of wanting better tax policy in order to achieve more prosperity. In part because of demographic changes, tax havens and tax competition are necessary if we want to discourage politicians from creating “goldfish government” by taxing and spending nations into economic ruin.

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Borders protect some and endanger others.

Posted by: Richard L Kempe | May 13, 2016 10:44:01 AM

Actually, I don't think that "there’s a general consensus" on either one of these propositions. Has this guy ever heard of Kleinbard or Piketty?

Posted by: Publius Novus | May 13, 2016 11:04:28 AM