At a time when both public deficits and government spending are increasing (bank bailouts and stimulus packages), there is immense political pressure to address the issue of tax havens. Liechtenstein, Monaco and others who still uphold strong banking secrecy laws are now under intense scrutiny.
The European Commission would like to see a system of financial data sharing, in which governments can access information about their residents’ financial state, no matter where they transfer their money. It is argued that this will enable governments to clamp down on tax evasion. Even ignoring the grave implications for civil liberties, it would, however, appear that the crusaders against tax evasion are taking the easy way out.
It is important to remember that tax evasion is already a risky endeavour. For example, when in 2008 an employee of a Liechtenstein bank stole files containing sensitive financial data and disclosed them to several tax authorities, a wave of arrests followed.
Moreover, if evasion occurs on a large scale, one could view this as a clear indication that taxation has reached excessive levels. With this in mind, it is not plausible that evasion could be eradicated or substantially reduced without incurring harmful side effects. In particular, it is reasonable to assume that many valuable economic activities would be scaled back if heavily-taxed individuals knew that there was no way of lowering their burden.
Furthermore, it is wrong to maintain, as the adversaries of tax havens implicitly do, that the amount of revenue a government “needs” is somehow “given” and that evaded money reduces the provision of essential public services. If this was the case, why do we often observe budget deficits in years when tax revenues are high?
For example, the government of Austria predicted a balanced budget for 2007. But even though that was a year of exceptional economic growth and buoyant tax revenues, the government stayed in the red. It had spent the windfall as quickly as it had earned it. With governments facing strong incentives to push spending well above optimal levels, the existence of loopholes like tax havens can act as an important check against spending excesses.
If they want to discourage tax evasion (and legal avoidance), governments should focus on restraining their spending, simplifying their tax codes and improving the incentives for work and enterprise – this would be a more effective economic strategy than heavy-handed international regulation based on a profound mistrust of their own citizens.