One of the major issues to be discussed by the participating countries of the G8 Summit taking place this week is the issue of offshore tax havens, where business owners find ways to hide their assets in order to avoid paying taxes on them. Naturally, governments see any threat to their revenue as a major problem and will doubtless take strong measures to attempt to prevent companies from getting around the law in this way, but is this really the right approach?
The very existence of tax havens demonstrates a fundamental axiom of economics, namely that people respond to incentives. When you threaten to take people’s money away from them, they quite reasonably try to find a way to hold on to it. The problem is there is a large amount of waste and inefficiency associated with efforts to circumvent enforcement. Every dollar spent on lawyers and acounts who come up with clever ways to hide assets overseas is a dollar that could be spent on something productive.
Likewise, every dollar the government spends in its efforts to prevent cheating, whether it be in terms of prevention, detection or enforcement, is one that could be better used elsewhere.
Doubtless, efforts to crack down on tax havens will involve tighter regulations, more oversight and more spending, but this only exacerbates the problem. The harder the government works to prevent tax evasion, the harder people will have to work to evade tax, and the more waste there will be. It doesn’t matter how much pressure is exerted, there will always be an escape path for those willing to find it.
This whole approach is therefore misguided. Tax evasion cannot be realistically prevented when there is so much money at stake, and at some point the effort becomes more costly than the reward. Canada, perhaps understanding this at least in part, has shown great reluctance to take aggressive measures against tax havens, but total inaction here is not really the best strategy for improving the country’s economic situation.
A far better way to reduce these inefficiencies, and in the process improve the economy, would be for the G8 nations to adopt simpler, fairer tax codes that are less easy to exploit and provide less incentive to try. Then, all that wasted money formerly devoted to finding loopholes in the tax code could be instead invested in new technologies, scientific research, business ventures and other productive activities that would improve life for all of us. And as wealth increases on a large scale, governments would find that their revenue would not be as reduced as they might have imagined, even in the face of lower rates.
Tax havens are an inevitable symptom of the disease of overly complex, punitive tax codes that make people feel cheated out of their own money. Treating the symptom with oppressive regulations will not cure the disease, and in the long run will only make things worse for the patient – us.