Diego Zuluaga is Head of Financial Services and Tech Policy at the Institute of Economic Affairs.
Judging from headlines about corporate shenanigans and astute stratagems by the well-to-do as revealed by the Paradise Papers leak, you would think that treasuries in the rich world were being starved of tax revenue. In fact, tax pressure on the private sector has done nothing but increase since 1980. What is more, revenues from corporation tax across the OECD have increased during this period, both as a share of all tax revenue – from 7.5 to 8.5 per cent – and as a share of GDP – from 2.3 to 2.8 per cent.
Marginal tax rates for individuals, meanwhile, have steadily declined in Britain, America and most European countries. But the trend has been accompanied by a steady rise in the share of all tax revenue paid by the better-off. A number of factors have brought about this development. Salaries of the highest-paid have increased especially fast as the world globalised and the economic implications of management decisions became commensurately greater. Additionally, declining tax rates have encouraged the rich to reduce their expenditure on avoiding the taxman via legal but complicated schemes. Finally, as the Laffer Curve predicted, declining tax rates have reduced the disincentive for productive people to produce.
Whichever way you slice and dice it, there is no escaping the fact that the rich are paying more tax than ever in modern history, both as a share of the tax that we all pay, and in absolute terms.
Nevertheless, the narrative has set in that widespread tax avoidance by wealthy individuals and transnational corporations is making us all poorer. And politicians are inclined to act on the popular narrative, regardless of its truth or falsity. It is therefore likely that the Paradise Papers, together with past and future tax non-scandals, will eventually cause lawmakers to try and stem tax avoidance by the only means possible: capital controls.
This would be an historic mistake. Capital mobility has been at the heart of the global economic convergence the world has experienced since 1980. Globalisation in turn has raised more than 700 million people from poverty in China alone, doubled, tripled or quadrupled incomes in every Latin American economy bar Venezuela and Cuba, and is now poised to place Africa on a persistent upwards growth path.
Offshore centres have played a salient role in these developments, as they give international investors a neutral and secure location in which to establish the entities that intermediate their funds. It may come as a surprise in light of where the media focus lies, but double taxation by predatory treasuries in different countries is still a far bigger problem for economic welfare than tax avoidance. So are the greedy paws of corrupt officials in developing countries, who would shake down foreign investors if the latter had no recourse to offshore financial centres. The irony is that the money would then probably also end up in a tax-sheltered account, the only difference being that it would be unearned rather than earned wealth.
Many seem to believe that the capital based in so-called tax havens is sitting there gathering dust, like many a Saudi prince’s Lamborghini. It isn’t. For the most part, capital in offshore centres is invested around the world, fetching rates of return far in excess of bond yields and the value that most government expenditure can generate. It is unfashionable to praise tax avoidance, but ask yourself the following: would you rather corporate profits be spent on the white elephant of the day, whether HS2 or a ghost airport in Spain? Or is the money better allocated on research and development by private firms? Bear in mind that nothing illegal is going on here: we are talking about entirely legal alternative uses of capital.
If capital mobility were halted, individuals and firms would have a much harder time voting with their feet against confiscatory rates of taxation such as those implemented by François Hollande. People in countries with a weak rule of law would be at the mercy of satraps and triple-digit inflation. Never mind that Meg Hillier, the surely well-meaning chairwoman of the Public Accounts Committee, is just calling for greater transparency. The reason we have banking secrecy is precisely so that persecuted groups, such as Europe’s Jews in the run-up to World War II, could take financial refuge from their persecutors.
Tax avoidance is not just human nature but an essential device to keep government power in check. Furthermore, the role of offshore centres in facilitating the movement of capital has been, and will remain, central to economic growth. Not to mention the prospect of a Venezuela-style Labour government in due course – a time when perhaps even the Queen’s estate will not be safe in Britain.