What tax havens teach us about the benefits of low-tax economies

Matthew Lynn

3 November 2007

What are the three richest countries in the world? You might be tempted to answer America, maybe Switzerland, or perhaps even Ireland.

You might say, as well, that the tax havens are rich because they are corrupt: they are refuges for corrupt dictators and drug dealers and tax evaders, who are allowed to launder their illicit gains through their banks and trust companies.

But though money laundering through the Cayman Islands may be a staple of popular fiction, there isn’t much evidence for it in the real world. Most criminals launder the proceeds of the crimes domestically, since they are well aware that moving their money across borders only increases the chances of detection. Terrorists use traditional networks of money changers – not banks in Jersey.

Governments should spend more time worrying about why it is that so much development aid ends up lining the pockets of a corrupt elite than where the money ends up. There is always going to be a bank somewhere that will take their money: even if there wasn’t they’d stash it away in gold or diamonds.

Low-tax territories provide an alternative to the high-tax world. They impose some discipline on governments elsewhere, restricting the amount they can raise in taxes by providing an escape route. But more importantly, they demonstrate the ability of lower taxes to consistently raise living standards, even in the most unpromising locations.

Maybe it is time to stop hammering the tax havens – and start trying to learn from them instead.