What Are Tax Havens – And Will Governments Crack Down On Them?

Every so often we read that governments are going to crack down on tax havens and offshore bank accounts. The latest threats to do this have come in the wake of the financial crisis and economic recession that began in 2008.

However, attacking offshore tax havens is not new. And it would appear that such attacks by various politicians rarely amount to more than window dressing to placate the masses and an attempt to divert blame for any economic woes from themselves.

Before answering the second question posed in the title of this article, it would be a good idea to clarify exactly what a tax haven is.

A tax haven is a country which has little or no income tax. Some tax havens have zero income taxes, while others may have very low taxes – or only tax local income not worldwide income.

To give a few examples: If you live in Hong Kong you will be taxed at a flat rate of 17% on your income. On the other hand, if you live in New Zealand you will be taxed on a sliding scale all the way up to 38%. Obviously if you lived and worked in Hong Kong, then you?d be keeping a lot more of your own money.

Another issue is whether a country taxes domestic income only or worldwide income. Most countries tax worldwide income, which means if you live in the USA but earn income in the UK, then the UK income is also taxable and is to be considered part of your total income for tax purposes.

But if you lived in Singapore and made money outside that country, then you wouldn?t be liable for income tax on the overseas income, only your local income. So while Singapore is not considered a tax haven in the usual way, it is in fact a tax haven for those who live there and earn money outside Singapore.

The attraction of tax havens is obvious. If you live there, or do business there, you could end up keeping a lot more of your own money. For it never pays to forget that income tax is a tax on your very life. Your labour is part of your life. If someone were to claim 80% of your labour without pay, and only give you food and shelter in return, then you?d have a good working definition of slavery. And the rates of tax prevalent today are akin to slavery in every way – with most developed countries raking off 50% or more of their resident?s money with income and other forms of tax.

So a tax haven is exactly that – a safe haven, if you will, from predatory taxes.

Trouble is, high-taxing countries hate this. They don?t like having to compete with other countries in the matter of tax. And if truth be told, most governments of the developed world would very much like it if such tax competition was abolished, by getting rid of tax havens.

But it?s not as simple as it appears. The tax code of any particular country is a matter for that country to decide. If Hong Kong levies an income tax of 17% on its residents and New Zealand levies up to 38% – who?s to say that Hong Kong shouldn?t be allowed to do it?

And that?s the problem. The very notion of abolishing tax havens implies abolishing each country?s sovereignty. It means that someone, somewhere, is going to dictate to every country what its income tax rate will be – and that in order to eliminate tax competition the rates for all countries must be the same.

Of course, this will not happen – not without a one world government and a one world tax system.

The truth is tax competition, like any competition, is healthy. The very existence of low tax or no tax jurisdictions keeps other countries on their toes, and draws a line in the sand as to how high they can push their own tax rates – without causing an exodus of their best and most productive people.

But there are other reasons why tax havens and offshore bank accounts will not be abolished any time soon. Human nature. And in particular the nature of many politicians. You see, if there were no tax havens, no places to ?hide? money – then what would the corrupt politicians of this world do with their ill-gotten gains?

No, the powers that be, at the very top echelons, require places where they can stash their cash. All their threats about abolishing or doing away with tax havens are but hot air – and hypocritical to boot. Because at the end of the day the people who benefit most from the existence of different tax rates around the world are the people with money – the same people who pull all the strings. To abolish tax havens would be akin to cutting their own throats.

So don?t expect tax havens and offshore banking to disappear any time soon!