All at Sea: The Misguided War on Offshore Financial Centres

Abstract

Corporate taxes are inefficient and have disproportionate deadweight costs. The optimal corporate tax rate is zero. Most voters are easily deluded into thinking that corporate taxes impose no cost on them, and politicians around the world have cut corporate tax rates, not because they have decided to put the welfare of the population ahead of electoral self-interest, but due to tax competition. The electoral cost of the economic effects of increased capital flight would outweigh the electoral gains from holding up corporate tax rates. Politicians outside tax havens are reluctant corporate tax-cutters and reluctant participants in tax competition. Ending such competition would suit them better than winning it. Principles that UK and EU politicians claim to support have been abandoned in the war on tax havens, including the sovereignty of third countries in tax policy, the right of law-abiding citizens to keep their financial affairs private, and the rule of law. The war on tax havens is an inherently dirty business. Most tax havens are stable democracies, with the rule-of-law and tax regimes that are superior to the inefficient systems that have become the norm in Western countries. The UK and EU have no proper justification for interfering in their affairs.