Why Don’t Tax Havens Become Industrial Powerhouses
by Mike Kimel
Why Don’t Tax Havens Become Industrial Powerhouses
Cross-posted at the Presimetrics blog.
The other day I read somewhere (yet again) that low tax rates encourage development. Which got me to thinking about tax havens. I’ve noticed that places like the Cayman Islands, for instance, seem to be magnets for hedge funds, but rarely if ever do countries which are mainly known as tax havens become industrial or technological powerhouses. What gives?
Here’s my thought… a hedge fund can buy and sell assets in country A from anywhere in the world, provided that it knows that country A has strong property rights, infrastructure, and legal institutions. If it can take advantage of those property rights, that infrastructure, and those legal institutions without paying for them (i.e., if it can free-ride), it can increase its private profits by having others pay for some of its costs.
Of course, a manufacturing, tech, or creative firm can also increase its profits by exporting its costs onto third parties (think externalities) which would make a tax haven ideal for such firms too. And yet, except for some transfer pricing games, for the most part, tax havens simply don’t attract or internally generate such firms in large numbers. My theory – it takes something else for that. It takes actually having a sound infrastructure (legal and physical), an educated populace, and a mindset, and these are things which tend to be generated by a not extremely incompetent government.
PS. Before the inevitable mention of Hong Kong, construct a Venn diagram of a) former British colonies and b) tax havens.
Why Don’t Tax Havens Become Industrial Powerhouses?
The same reason supermodels aren’t physicists…….they don’t have to.
Why Don’t Tax Havens Become Industrial Powerhouses?
The same reason supermodels don’t become physicists…….they don’t have to.
You go with your competitive advantages.
Why don’t we also do a compare and contrast of non-tax/Tax havens? I.E. Hawaii? California? Texas?
Hong Kong have a flat tax of 15% on income and a flat 17.5% on corporate taxes. No capital gains tax to speak of. But it does have specific tax on luxury items. I.E. Rolls Royce, Maybach… LOL I know because I lived in Hong Kong for 5 years… I don’t know it can be defined as a tax haven… Everyone pays taxes there, and there is no such thing as favoratism or tax deductions… If your US citizen you must file for global tax for the privilege of being an US citizen….It’s not a tax haven…
The US is also a “Tax Haven” Just ask your friendly congress for your own tax break. Our farm products are heavily subsidized, certain products such as ethanol are encouraged.
By the way. Hong Kong in the 60s-70s are famous for their textile industry. The 70s for electronic watches. The 80s for the electronic components. They still pretty good for their toy industry but offcourse China overshawdows everyone else.
I think the explanation is quiet simpler than that: most tax havens are tiny, too tiny to install any significant industry (lack of land and population). On top of that many are isolated (islands), so the supply chain is more complicated.
LOL- I forgot. Hong Kong have a very well established entertainment industry. Bryce Lee in the seventies, then people like Chun Yun Fat, Jackie Chen, Jet Li appeared…
Also Singapore has a pretty important industrial sector (electronics, oil rigs, pharmaceutical, etc.)
Slight correction: comparative advantages. But yes.
If you can bloat rich and fat by skimming 0.005% off the top of financial flows, why bother with the hard stuff of industry?
Actually, there are a number of not-so-small countries that would qualify as tax havens if we thought about them in terms of taxes. Saudi Arabia, for instance, has a population that is closing in on 30 million. Locals pay a small religious tax (zakat) which I believe is about 2.5% of net worth. As to foreign money – for the first ten years of its existence, for instance, a company with at least 25% local ownership is exempt from income taxes. In practice, exemptions and/or big breaks last for longer than that if you are involved in something that the Saudi government wants to encourage, and what sort of economic activity do you think the Saudi government doesn’t want to encourage?
And then we can talk about the difference between theory and practice. I’ve lived enough time in South America to know that for practical purposes, tax evasion is comically easy for companies operating in places like, say, Argentina. I suspect the same is true of Mexico. And that can even apply in Europe – not long ago there were a spate of stories about how little the Greek government collected.
Sammy & Tim W.,
One can extend your argument into: “because the Cayman Islands attract so much tax evasion related money, they haven’t bothered going through the effort to market themselves as a tourist destination.”
One constant in the developing world is “how do we become like the industrialized countries.”
Now… the argument I did expect from you guys was Ireland from a few years back… but there along with the transfer pricing games there were also big transfers from the rest of the EU which comes to the point of my post.
Ah… and one other thing about the Cayman Islands and their efforts to market themselves as a tourist destination. It isn’t strictly true that they have a comparative advantage in providing tourist services when you take into what neighborhood they are in.
If a cruise ship scheduled to land in one Carribean island inexplicably docked at a different one, how many of of the passengers would care? Ditto folks with plans to spend a week lounging on the beach in one island. Considering who they are competing with for the tourist dollars, do any of the Carriebean countries really have a comparative advantage relative to any of the others? And yet, many of them do spend serious amounts of money trying to boost their tourist trade.
And if you insist on mentioning Hong Kong don’t ignore Germany.
Tax havens become powerhouses in providing tax haven services. That’s their comparative advantage so I don’t see any further untility in this question. Companies try to maximize profits, if doing some paperwork in tax heavens help them do this then they would be negligent not to.
Re the US transformation into a relative tax haven: I can’t help noticing how that appears to have correlated with the decline of our industrial competitiveness. We tax advantaged the FIRE sector at the expense of manufacturing. And by we I mean it’s a largely non partisan issue beyond the scope of most political debate within either party. Why?
As noted below, many of these tax havens also seem to seek out other niches even if they have no real comparative advantage in those other niches relative to their neighbors. The Cayman Islands works hard at being a tourist destination and attracting a lot of cruise ships, despite having no camparative advantage at that relative to other Carribean Island states. Thus the further utility to the question, to use your terms.
Where business decisions are concerned, the effect of taxes on the margins are relatively insignificant when compared to costs of your capital assets and operating costs.
Cross-posted at Presimetrics:
Beating my current-favorite spoon on my current-favorite highchair yet again some more:
Stocks of financial assets are not real assets. It doesn’t matter where financial assets reside. It very much matters where real assets reside.
The widespread confutation of the two — as if they were somehow synonymous — creates massive misunderstandings.
Real assets constitute our true national wealth — our capacity to produce in the future. Financial assets are just storage containers for potential future spending (investment and consumption), like cookie jars full of money.
Example of the confusion: “We can’t tax financial assets because they’ll just move elsewhere and we won’t have investment here!” (Again, confusing investment spending with so-called “investment” in financial assets, properly known as “saving” but perhaps better understood as “storage.”)
1. Who cares? If there are attractive/lucrative domestic real-investment opportunities, then financial assets, in the form of money, will flow in from wherever.
2. We tax worldwide income (well, at least of natural humans), why not worldwide holdings of financial assets?
Just a reminder, btw, that real assets do not only include NIPA’s structures, equipment, and software. They also include (at least): 1. infinite varieties of human, cultural, and organizational capital: ideas, knowledge, methods, techniques, business processes, skills, character, beliefs, trust, etc. 2. natural resources.
It takes both effort and money (the latter flowing out of financial assets) to create/develop all those different forms of capital.
But that money can flow from anywhere.
We have selective taxation system. We tax progressively on people that are productive and honestly file their tax returns without asking for favoratism. The corporations, depends on big and how aggressively they lobby and/or uses the US Congress gets a favorably reduced tax rate. I.E. Google, GE being the most recent examples. They have their Congress approved taxation… This is a ongoing non-partisan issue. This is an example of sanctioned corruption.
F.Y.I. Bershire effective tax rate is about 29%
Aaron and Mike,
Yes to Aaron’s notion that there is a comparative advantage being exploited. I am baffled at the rest of Aaron’s comment, though. Somehow, once “comparative advantage” is typed out, the subject becomes devoid of interest? How odd.
Noting that a region has a comparative advantage at what we find it doing is tautological. We have discovered nothing by saying West Virginia engages in mountain-top removal coal mining because it has a comparative advantage in mountain-top removal coal mining. Why is there a comparative advantage for West Virginia in mountain-top removal coal mining and for the Caymans in sheltering corporate income from taxes?
One of the notions that gets lost in discussions of trade is that a comparative advantage is not necessarily an absolute advantage. The State of New York may have an absolute advantage in offering tax havens, but does so on a more limited basis than the Caymans. The point to comparative advantage is that the Caymans don’t do anything better than they offer tax havens. Economically, they are kinda crappy. Tax havens are a pretty poor line a work. Hosting post boxes and mail clerks doesn’t make you rich, but if that’s all you can manage, so be it.
The comparative advantage analysis may not be all that helpful when it comes to cruise ships. The Caymans may be a complimentary good, rather than a competing good, when it comes to cruise ships. Assuming there are cruises traversing that part of the Sea already, another stop may be welcome. A cruise coming out of Jamaica may need another place to stop, if that place has proper facilities. In addition, the concept of comparative advantage is mostly useful in demonstrating the reason for two-way trade. Relative to other Caribbean locales, the Caymans need not have a comparative advantage as a cruise ship port. Only relative to Iowa or Badem Wurttemburg, where goods that Cayman residents want are produced.
If sammy thinks that the reason models don’t become physicists is that they don’t have to, then I suspect he knows very little about physicists. I have met a handful of them, and none went into physics because they had to. Being able to do something other than physics is not a reason to stay out of physics. Physicists all have the capacity to work as actuaries, but they don’t.
And, by extension, the notion that being a tax haven is reason to forego other economic opportunities is pretty silly. Tax-haven-workers are extraordinarily efficient. As a result, few are needed, and so very little of the wealth of the (un)taxed flow of cash stays in the Caymens. They need other lines of work, but for the same reaaon that they have a comparative advantage in being a tax haven, they lack comparative advantage in other enterprises.