No refuge for the overtaxed

The Wall Street Journal covers congresscritters' latest attempt to prevent Americans from seeking refuge from confiscatory confiscation overseas -- and to punish countries that would dare to offer a relatively friendly, low-tax environment to anybody seeking such a haven. Two separate bills would penalize Americans who invest in a blacklist of low-tax jurisdictions, effectively subjecting them to double taxation.

Unfortunately, the Journal article is behind a subscription wall, but you can find a summary here.

This seems an appropriate time to republish a 2002 column I wrote in praise of tax havens. At the time I distributed it, the piece seemed to strike a chord; several newspapers picked it up. I think it's as appropriate today as it was four and a half years ago.

Tax havens provide refuge for the oppressed

Congress and the Internal Revenue Service have expended considerable effort in recent months in targeting overseas tax havens. Too many Americans are evading their fair share of the national tax burden, D.C. insiders say, by hiding money in offshore bank accounts and transferring their businesses to low-tax Bermuda.

"There's tremendous unity in the House that dodging American taxes is un-American," huffed Rep. Nancy L. Johnson of Connecticut.

The European Union shares American concerns about tax havens. In an effort to track down Europeans who hide money overseas, EU officials tout a Savings Tax Directive that would mandate exchanges of information between nations about accounts held by nonresidents. With the information in-hand, tax authorities could hunt down funds cached around the world.

Oddly, though, one of the offending tax havens targeted by the EU is the U.S. How's that? Isn't the U.S. government dedicated to battling outlaw nations which ally themselves with tax evaders?

Well, it turns out that "tax havens" are in the eye of the beholder. In a recent article about the tax-haven controversy, Charles Adams, author of "For Good and Evil," a history of taxation around the world, defined a haven as "a kind of economic sanctuary, a modern city of refuge for those oppressed with the fiscal laws of their homeland."

Adams compared the refuge offered by tax havens with the sanctuary that Canada offered American draft resisters who opposed the Vietnam War. Like those young men, modern tax resisters flee something that they find oppressive -- in this case, government officials with a taste for other people's money.

"The U.S. tax burden is dramatically lower than that of the EU, representing 29% of GDP, compared to the EU's 42% average," points out John Blundell of Britain's Institute of Economic Affairs. This makes the U.S. a tax haven, relative to Europe. "Partly as a consequence," says Blundell, "the record for annual foreign investment into America -- a key determinant of recent U.S. prosperity -- has been broken on an almost monotonous basis."

Were American politicians to give in to European demands and snitch about money invested in the relatively low-tax environment offered by the U.S., they'd be surrendering the country's "tax haven" status -- and the significant flow of investment capital that accompanies that outlaw appellation.

The Cato Institute's Veronique de Rugy estimates that the EU's financial information scheme would drive at least $1 trillion out of the U.S., were it to be adopted.

But tax haven status is a relative thing, and a haven for Europeans is still a hostile environment for Americans who want to hold on to their earnings. The IRS digs through credit card records in search of off-shore accounts and Congress denounces "corporate traitors" because many individuals and businesses based in the U.S. consider paying domestic tax rates akin to a mugging, and they do their best to hold on to their funds.

According to the Washington Post, "The United States, with its 35 percent corporate income tax and its byzantine rules for taxing worldwide profits, is not a particularly friendly tax environment." Europeans may disagree, but only because their own tax laws make even the U.S. tax code look inviting.

Like corporations, individuals find benefits in hiding income and investments in tax-friendly environments. The growth of the internet has put tax havens at the disposal of average Americans even as high rates and incomprehensible rules have made such havens increasingly attractive.

Even Treasury Secretary Paul O'Neill conceded that "our tax code is an abomination," though he referred more to its complexity than to its appetite.

If the flight of people from financially oppressive governments is equivalent to similar escapes from political oppressive regimes, then crackdowns on tax havens take on a new and troubling light. The EU's Savings Tax Directive and the IRS's pressure on banks in the Caribbean start looking like the old Eastern Bloc's demands that West Germany surrender escapees to the authorities in East Berlin.

Rather than reduce their demands on their subjects, as the rulers of Eastern Europe were eventually forced to do, politicians in the U.S. and around the world want to create a worldwide financial regime that would leave no place to hide from avaricious tax collectors. Of course, such a cartel would succeed only if every single jurisdiction joined; but the current flow of European money to America, and U.S. funds to the Caribbean, give a foretaste of the benefits to be enjoyed by holdout nations.

"When governments tax too much, there is an iron law of history, that taxpayers will respond in some direction for relief," says Charles Adams. Such relief takes many forms, including fraud, flight and even violence. Throughout history, people have proven exceedingly talented at resisting excessive taxation.

In fact, governments that lower taxes have often found that money reemerges from hiding places, and that people prefer the security of transactions conducted at home, in the open, so long as the state's take isn't too large. In a now-classic example, vast funds returned to the U.S. "above-ground" economy when tax rates were lowered in the early 1980s.

If politicians really want money and businesses to stay at home, they should curb their appetites, and let people keep their hard-earned cash.