Tax havens have become increasingly formidable players in the global economy. With increased globalization and financialization of the global economy, tax havens have become important players in the world economy. According to a report by Tax Justice Network, $21 to $32 trillion is stashed offshore. According to the World Bank, the GDP of the world was US $73.4 trillion in 2015. This shows the importance of tax havens in the world and the influence they have on the world economy.
The money that pour into tax havens does not stay there, but is invested in various countries. However, any financial flow through a tax haven makes it tax-free, and any return on it tax-free as well.
Corporations and wealthy individuals invest their finances through tax havens to avoid paying taxes or reduce their tax burden. Canada is not immune to it as well.
In 2015, Canadians put $40 billion in tax havens while the total amount of wealthheld in top ten most popular tax havens is $270 billion. This shows that Canadians put significant amount of capital in tax havens. Therefore, the outflow of capital to tax havens is a concern for Canada as well.
The US is also prone to outflow of capital to tax havens. US corporations and wealthy citizens pour capital into tax havens. In 2013, US corporations held $2.1 trillion in untaxed foreign profits held overseas. This shows the level of foreign profits that US corporations hold overseas. If these overseas profits are brought into the US, this will generate increased levels of economic activity and employment generation in the US.
According to a report by US PIRG Education Fund and Citizens for Tax Justice (CTJ), US-based multinational corporations evade $90 billion of federal income taxes each year. This is a substantial amount of revenue that the US federal government could use to support its various programs.
This shows that US corporations do not necessarily need to go to tax havens outside the US but take advantage of domestic tax havens to reduce or eliminate their tax burden.
Some of the leading economists of the world mentioned that tax havens ‘serve no useful economic purpose’. It is true that tax havens do not serve any useful economic purpose, as they do not necessarily augment economic activity or increase the level of employment in a society. A counter-argument can be that tax havens reduce or eliminate taxes that lower the cost of doing business. This boosts the incentive to invest which leads to increased economic activity and employment.
However, the capital flow through tax havens are ultimately invested in countries where tax is imposed and going through tax havens only lead to tax avoidance. As the capital is ultimately invested in non-tax havens, companies and wealthy individuals would invest even if tax havens did not exist. Therefore, it can be argued that tax havens do not have significant influence on capital investment and employment generation, and do not necessarily boost capital investment and employment generation. On the other hand, tax havens allow corporations and wealthy individuals to avoid paying taxes, and dodge their tax and social obligations to the societies in which they operate.
Even though tax havens ‘serve no useful economic purpose’, they have important effects on countries. When companies and wealthy individuals evade tax or lower their tax burden by channeling their funds into tax havens, it leads to lower government revenues. When the government has lower revenue, it can fund fewer infrastructure, build fewer public schools, provide less subsidized or free healthcare, and provide fewer social programs for the marginalized sections of the society.
This shows the negative impact of tax havens on a society that experiences capital outflow to a tax haven. When the government has less money to invest in infrastructure and social programs, it leads to poor infrastructure, and lower health and education of the population that in turn lead to lower human capital in the country. This decreases labour productivity and dampens economic activity in the country. Therefore, tax havens can have serious deleterious consequences, both economic and non-economic, for societies.
In Canada, when corporations and wealthy individuals pour capital into tax havens, there are lower tax revenues for the provincial and federal government. When they are evading or lowering their tax burden, the government cannot finance its various programs. Also, to maintain its expenditures, the government has to increase taxation on other sections of the society.
This invariably means that the tax burden on the middle-class and low-income segment of the population increases. The same is true in the US as it leads to lower tax revenue for the federal government, state governments and local governments. Therefore, tax havens lead to two problems, lower government revenues that make it difficult to fund government programs and increased tax burden on the middle-class and low-income segments of the society.
Tax havens have become increasingly important players in the global economy. A significant portion of global finance flows through them. Other than allowing tax avoidance and reduction of tax burden by corporations and wealthy individuals, tax havens do not play any beneficial role for the society. However, they lead to lower government revenues that make it difficult for governments to finance various programs while shifting the tax burden on the middle-income and low-income segments of the population.
A concerted effort by various countries, especially ones with large economies, and international organizations to reduce the practice and existence of tax havens could lead to decrease of tax avoidance by corporations and wealthy individuals. This will enable governments to generate more revenue that could finance various social programs as well as decrease tax burden on the middle-class and low-income section of the society.