U.S. War on Tax Havens Is Counterproductive

The new administration in the U.S. is trying hard to increase tax revenues in any way they can. The war on tax havens which was declared a while ago can be felt by global offshore financial centers worldwide. Switzerland might have received the most attention so far, mainly because of the UBS story, but the situation is very similar for all offshore financial centers.

But let me clarify one thing, there really is no such thing as a tax haven –‘haven’ is a relative concept for each of us. In practical tax terms, it simply means that these so called haven countries have their own taxation system and legal and regulatory frameworks.

In an attempt to achieve full transparency for financial transactions, and thus tax liabilities, the IRS in the U.S. as well as some of the larger European countries are demanding an increased exchange of bank account and financial transaction information. Politically, it is relatively easy to get support for such aggressive measures during times of financial distress and economic difficulty.

Finding something or somebody to blame for the current trouble gives at least temporary relief and probably more votes for politicians that claim to fight that war on behalf of its people. Today’s society and individuals have an almost chronic habit of trying to find somebody or something to blame for its own problems rather than take responsibility for one’s own action.

This behavior might in fact be the root of many of today’s problems, and, what might seem an appropriate solution today might be a very serious mistake in the long-term. We believe that the current aggressive measures against offshore financial centers will be very destructive to the economies of countries calling for such drastic regulation. Did you know that under the proposed law even Swiss citizens could become liable for U.S. inheritance taxes if U.S. securities are owned at the time of death?

This is a good reason for foreign investors to stay away from U.S. securities in my opinion – a big negative for U.S. investment markets. If you consider the almost “toxic” inheritance tax rates in the U.S., I think this makes a very convincing case against owning any U.S. securities at all. We think that the current administration in Washington is making several mistakes.

The bottom line is that this means it will get harder for U.S. corporations as well as the government to attract foreign capital at a time when the need for foreign capital is bigger than ever. A higher cost of capital is the ultimate consequence of such policies and this will in turn decrease competiveness and worsen the deficit of a country.

Comments

[Steve in Gr...:]

Great article. You headline is exactly right. Where we are today, the harder the government tries to collect taxes (particularly the more punishing it is toward the high earners) the less taxes it collects.

Of course, lower tax receipts for the government is a good thing, but it unfortunately comes at the cost of unemployment which hurts the low earners disproportionately.

If the government really wanted to help the poor, it would reduce top marginal income tax rates which would attract capital and increase employment and wages. But it doesn't. It wants us to be unemployed so we will be dependent on them.

Oct 13 08:35 AM

[Pat C:]

I'm flabbergasted, how about the question of equality among our citizens? Excuse me for my nationalistic biases, the author can take up citizenship on the moon.

Oct 13 09:42 AM

[manya05:]

I do not think the real reason behind this aggressive behavior is to keep US assets and money inside the US (and away from tax heavens), it is to keep US citizens from emigrating. The decay in US society and living conditions has been quite pronounced in the last 25 years...and you ain't seen nothing yet. Many Americans are having trouble getting their brains wrapped around the idea that a nation of immigrants can become a nation of emigrants. But it can happen (precisely because of that immigrant mentality), and it has happened in many places around the world. It can very well happen in the US and the ruling class wants "to keep'em in"

Oct 13 12:33 PM

[Alan Young:]

There are plenty of reasons for foreign investors, or even US investors, to avoid US equities; but the assertion that taxation tops the list (or even comes close) is outrageous.

Some rich people want to skim the cream from the economy and take it offshore without giving anything back. This parasitic behavior by the super-rich has destroyed the middle class in some societies, and the sustainability of an investible market along with it. In the US. it inhibits economic recovery and pushes the public's fiscal problems closer to the brink. If we the public do not collect taxes from the rich, then who the h¢ll do you think is going to pay for the basic services of our society—the social infrastructure that make an investible market possible?

If you want an investment environment free from taxation, see what kind of luck you have in Somalia or Afghanistan. Only failed states do not collect taxes. The most prosperous societies (e.g. Norway, Sweden, etc.) have the highest personal taxes, and their citizens are quite content with the trade.

Oct 13 01:37 PM

[Chancer:]

The USA and EU really want to put the "tax havens" out of business, because they do not want competition from nations with lower taxes.

Nancy Pelosi recently stated that we need to "level the playing field" with Europe by adding a value-added-tax to the US tax system.

Translation: It is unfair that Americans pay less taxes than Europe and have a higher standard of living. Americans must pay more taxes and reduce their standard of living to the level of other nations- to be fair.

Of course, the end game for the liberal objectives is more tax revenue for the socialists to push their welfare state agenda.

Oct 13 01:46 PM