Blog cafe Haven or hell

Written by The Financial Express | Updated: Jul 31 2008, 06:10am hrs
One of the most interesting discussions among the economists and policy experts is a debate about the role of tax havens and offshore destinations that compete with other nations in the areas of taxes, regulation and investor protection. The opponents of tax havens believe that tax havens cause an enormous damage to the economies on the other side of the world since (in their opinion), tax havens are the fundamental reason for the lack of reinvestment and capital flight in onshore economies. The real reason why tax havens are prosecuted by governments is that government agents seek the highest possible utility from tax revenues in the form of rent-seeking that would yield more power and revenue.

Dan Mitchell recently explained the positive role of tax havens in a global economy. From a basic perspective, minimal tax burden in tax havens is a liberalizing force in the world economy since, given capital mobility and the fluidity of knowledge, destinations with higher corporate and personal income tax burden have no choice but to reduce tax rates on productive behavior. Flat tax revolution, that was initiated by Estonia in early 1990s, also helped reduce corporate tax rates in continental Europe and Scandinavia.

Regarding tax havens, supply-side economic and tax policies induced the trend of lowering tax rates on all sources of productivity ranging from investment, savings and entrepreneurship to labor supply. Concerning regulation, high corporate tax rate and excessive regulation usually go hand in hand since the regulation of the private sector is mostly an implicit insurance against the loss of control andhencethe loss of tax revenue that is needed to finance government spending.