October 5, 2001

October 5, 2001 | Commentary on Taxes

Don't Scapegoat Tax Havens

Thanks to President Bush's strong leadership, America and its allies are preparing to wage a relentless war on terrorism. This means settling the score with the thugs who organized the Sept. 11 attacks and forcing changes to the rogue regimes that harbor terrorists and help them murder innocent civilians.

It also means following the terrorist "money trail" in order to identify additional perpetrators and learn how to detect and avoid future attacks. Unfortunately, some politicians seem to think this gives them an excuse to target low-tax jurisdictions.

Sens. John Kerry, D-Mass., and Carl Levin, D-Mich., for instance, say so-called "tax havens" are guilty of laundering terrorist funds. These politicians have introduced legislation to impose protectionist barriers against these jurisdictions, and they're threatening to add their proposal to the Anti-Terrorism Act, even if it bogs down the entire bill.

This attack on low-tax jurisdictions, which has been echoed by a handful of liberal journalists, is completely misguided. In part, these critics have a grotesquely inaccurate conception of tax havens. But in other cases, these low-tax countries are being assaulted because they show that free-market policies create prosperity. For many left-wing politicians, this is an unforgivable sin.

Contrary to the impression given by John Grisham novels and Hollywood movies, "tax havens" aren't tropical paradises filled with people carrying cash-filled suitcases. That's why lawmakers need to make sure they have the right answers to the following questions before they allow misguided proposals to creep into law under an anti-terrorism banner:

What are tax havens?
A tax haven is a country with tax rates low enough to attract foreign investors. The world's biggest tax haven is the United States. We have very competitive tax and privacy laws for overseas investors, and this has helped attract more than $5 trillion of foreign capital to our economy. Other havens, such as Switzerland with $2 trillion and the Cayman Islands with less than $1 trillion, are minor league compared to America.

Why do some politicians hate tax havens?
Because they offer an escape hatch for oppressed taxpayers. French taxpayers bring their money to Switzerland; German taxpayers bring their money to Luxembourg; and the world's taxpayers bring their money to America. Equally important, tax havens don't help high-tax governments collect tax revenue. They assert, quite correctly, that they're not obligated to put the tax laws of other nations above their own and that high-tax nations don't have a right to tax income earned inside the borders of low-tax countries.

Is bank secrecy an obstacle to law enforcement?
Every nation in the world has bank secrecy, including the United States, but every country allows that secrecy to be pierced for criminal investigations. It is ludicrous, therefore, to assert that privacy laws help criminals.

In fact, almost all of the famous tax havens, including the Cayman Islands, Switzerland and the Bahamas, have legal-assistance treaties with the United States, which obligate them to cooperate in the investigation and prosecution of universally recognized crimes.

Do "offshore" jurisdictions launder dirty money?
There is no evidence that low-tax nations attract a disproportionate share of dirty money. Most criminal proceeds are obtained and laundered in the United States and Europe. The United Nations, moreover, has acknowledged that criminals avoid so-called tax havens since they're a "red flag" for law enforcement. It's worth noting that the Sept. 11 terrorists apparently relied on cash transfers -- as well as the banking systems of England and America -- to obtain funds.

This isn't to say that U.S. or English bankers were accomplices. In most cases, it's impossible for a financial institution to know that a customer has criminal intentions. This is why it's so ineffective to pass wide-ranging laws that undermine financial privacy. The best way to stop crime -- including terrorist acts -- is for law enforcement and intelligence agencies to focus their resources on suspected criminals and their associates.

In any event, tax-hungry politicians shouldn't use the Sept. 11 attacks as an excuse to attack low-tax countries. This shameless exploitation won't help the fight against terrorism.

Indeed, it may hurt it. The so-called tax havens are our allies, and they are helping us track terrorist assets. Do we really want to jeopardize that teamwork by trying to punish them for the "sin" of having low tax rates? 

Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

Related Issues: Taxes

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