The advantages of tax havens have been popular all around the world. Perhaps because of the calm of Easter Monday, the media did not notice the words of the American Minister of Finance Janet Yellen. It announced the US administration’s intention to enforce a globally binding corporate tax floor. If she succeeds, it means a small revolution in the world financial order.
What are advantages of Tax Havens?
The lower limit of corporate tax, probably well above zero, would, in such a case, mean the disappearance of tax havens, as we know them today. In essence, Yellen declared a “trade war” yesterday. Not to China like the previous Trump administration, but to tax havens. Their significance to the world involves fully comparable warfare.
Tax havens benefit enormously from the current state of the global financial order. And even more, of course, large multinational corporations that transfer their profits to paradises. Thus, while Western jobs are fleeing to China and other Asian and emerging economies, tax revenues to the West are irreversibly lost in tax havens.
In many Western European countries, in particular, the financing of a costly state of social welfare is becoming increasingly unsustainable, leading to extreme over-indebtedness in Italy and France. Although the European Central Bank is delaying the bankruptcy of Italy, for example, by squeezing interest rates, the result is a decline in the lifetime savings rate of the euro area population to practically zero or an increase in speculative demand for real estate. Hand in hand with this, there is a polarization of Western society, which is a water mill for anti-system political forces.
However, not all EU countries are damaged by the current world tax order. For example, the Netherlands, Ireland, and Luxembourg can also be tax-havens. However, the Netherlands, where the corporate tax rate is even higher than in the Czech Republic, would cope with the introduction of a globally binding non-zero corporate tax floor than the British Virgin Islands or the Cayman Islands, which do not tax corporate profits at all.
Corporate Tax Havens
The Netherlands is a tax haven not for a low corporate tax rate but first-class, investment-proof legislation. But the case of Ireland is already different. Four of Ireland’s five largest companies are large American technology companies branches.
Apple, Google, Facebook, and Microsoft have chosen the “green island” as their European base for its membership in the EU and the language skills of the local population, and the attractive tax policy of the Dublin government. Because of it, Ireland is even “at a crossroads” with the European Commission, which is highly bothered by sometimes extremely low, sometimes virtually zero, Irish taxes. That is the reason why corporations like to get the advantages of tax havens.
However, at these low taxes, Dublin is gaining a large number of well-paid jobs in an attractive and fast-growing technology sector that it would otherwise probably never get to Ireland to such an extent. The bargaining power of large corporations is therefore enormous. They have something to offer.
Suppose countries like Ireland do not agree to introduce a lower limit for a globally binding tax. In that case, such a solution is unlikely to work. But it depends a lot on how far the Biden administration will be willing to go. In three of his already approved or announced package budget measures, President Biden will pour over five trillion support dollars into the US economy, which is a historically unprecedented amount.
United States and Janet Yellen
In this context, last week, he announced his intention to increase the corporate tax rate in the US. However, this will again increase the motivation of American corporations to make profits abroad, to tax havens. Enforcing the global minimum corporate tax rate would therefore play a badge for him, which is why “his” Finance Minister Yellen is coming with him right now.
The United States may also impose sanctions on countries like Ireland to adopt a globally binding corporate tax floor as a last resort. They may also threaten to cut themselves off from the global financial system, which is still based on the dollar.
Carrie Lam, the administrator of Hong Kong, can say what such a cut looks like. The United States sanctioned it last year. It now receives a cash payout because even Chinese banks operating in Hong Kong do not want to risk a quarrel with the US Department of Justice. So the Biden administration has leverage to enforce the global minimum corporate tax. The question remains whether it will be willing to use it.
According to the OECD, the world, especially the West, loses $ 100 billion a year (according to other estimates, see here, even more than $ 200 billion) that it would gain from taxes if reforms were introduced that at least will dampen the spillover of profits into tax havens. That’s big money. But it remains to be seen whether they will cost the Biden tens of billions of dollars a year to try to overthrow the international financial order, even under severe pressure from military allies.
Moreover, in terms of the long-term development of the global economy, the “crackdown” on tax havens is mainly controversial. Their existence intensifies competition between tax jurisdictions. Therefore, economically advanced economies have reduced the corporate tax rate in the past twelve years.
Thus, the existence of tax havens also means that the expenditure extravagance of the West is not even more noticeable. So it doesn’t necessarily mean “race to the bottom.” If a minimum corporate tax rate were introduced globally, it would be easier for Western countries to increase it.
Conclusion on Tax Havens
So for a while, they will run a lower budget deficit or even reduce their debt. However, they are likely to return to the old ways in the medium to long term. Revenues from the increased corporate tax will receive their new uses as part of public spending, and deficits and deeper debt will be returned to the state.
Thus, a genuinely long-term sustainable solution is to streamline the state not to have extra income. The bonus of such a solution is that it does not give rise to growing tensions in the economic relations of countries such as the United States and Ireland.
At a time of looming new Cold War, the one with China, the West should stick together and push for more efficient and streamlined government rather than looking for new, but probably still temporary, sources of increased tax collection. If you want to get advantages of tax havens you should do so rather earlier, than later.