A brief look at tax havens around the world

Taxation not only forms the most important source in all countries but is also the prime source of government revenue. According to the recent estimates from International Centre for Tax and Development, it is found that total tax revenues account for more than 80% of total government revenue in about half of the countries in the world.

Looking from the historical perspective, the growth of governments and extent to which they are able to collect revenues from their citizens is a striking feature of last 2 centuries. Taxation patterns around the world reveal large cross country differences especially between developed and developing countries.

In particular, developed countries collect larger share of their national output in taxes than do developing countries and they tend to rely more on income taxation to do so. Whereas developing countries rely more on trade taxes as well as taxes on consumption.

Tax haven meaning the jurisdiction offering favourable tax and other conditions to tax payers as relative to other jurisdictions adversely affect the budgetary revenue of countries with higher taxation thereby giving rise to increased tax avoidance particularly the law, lawful and unlawful migration to the capital causing financial instability and circumvention of financial control and crises.

Some historians mention tax haven in the form of isolated islands during the time of ancient Greeks.

Some of the tax havens of our time are as follows-

1. Switzerland: Its combination of low taxes and banking system that protects the secrecy of those with accounts above all else has made it a popular destination for funds leveraged overseas to enjoy lower taxes.
2. Monaco: It is less than 1 square mile and has 38000 residents. This haven has a giant perk however- It has not charged its residents income tax since 1869. Those who can claim Monaco as their primary nation of residence will keep all the money they earn.
3. Mauritius: It is an island located in Indian Ocean several hundred miles east of Madagascar and is popular gateway for foreign investments especially those directed to India.
4. Isle of Man: It has no capital gains tax, turnover tax or capital transfer tax. The island situated between England and Ireland also carries a low income tax with higher rates at 20 percent.
5. Channel Islands: Located between England and France, the Channel Islands host hundreds of international corporate subsidiaries. For example, Morgan Stanley alone has 33 tax haven subsidiaries in this area according to report by the Citizens for Tax Justice.

So far we discussed about tax havens and which countries are good from low taxation or no taxation perspective. But let us now take a look at the consequences of tax havens-

1. Taxation is an important instrument to reduce inequality:

One way to gauge the extent to which taxation redistributes resources between individuals in a country is by looking at how the distributions of incomes change before and after taxes. The following visualization does this showing reduction of inequality that different OECD countries achieve through taxes and transfers.

The estimates correspond to the percentage point reduction in inequality as measured by the changes in the Gini coefficients of income before and after taxes and transfers.

Generally the countries that achieve the largest redistribution through taxes and transfers tend to be those with lowest after tax inequality.

2. Taxation can lead to Efficiency losses:

In market economies, consumers and producers change their behaviour in response to taxes. For example, if a taxed good has a substitute that is not taxed, some consumers will shift to the substitute to avoid the tax. These changes in behaviour can lead to inefficiencies. For example, high tax rates may discourage labour supply and in case of rich individuals, they may even induce migration of talent to countries where tax burden is lower. In both cases the size of pie would be reduced by taxation.

Finally, coming to conclusion it is found that at one level lower taxes or no taxes in one country can put pressure on other countries for keeping their taxes low. This is good for tax payers in short term but the secrecy and opacity associated with some of the tax havens may encourage money laundering or other illegal activities that can harm world economy in long term. The crackdown on tax evaders in some countries shows that tax payers need to tread with caution.

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