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.

The wealth of some of those territories is striking. Luxembourg and Bermuda have a GDP per capita of $71,400 (£35,072, E50,250) and $69,000 respectively. By contrast, America, the wealthiest of the mainstream industrial economies, has a GDP per capita of $44,000. Even the worst-off low-tax nation, Switzerland, has a GDP per capita of $33,000. And Britain, despite the endless boasting from Gordon Brown about the brilliance of its economic record, ranks only 28th in the world, on $31,800, slightly below Germany, and just a tiny bit above France.

(London, Europe’s wealthiest city, would belong to the top 20 if it declared independence – and with 112,000 non-domiciled residents paying virtually no tax, it is a bigger haven than Monaco and Andorra combined.)

In the past few years, politicians from the developed world have led a determined assault on tax havens. Norway has just launched an investigation into their role in sheltering development aid stolen by corrupt dictators. The Paris-based Organisation for Economic Co-operation and Development has led a series of attacks on the world’s tax havens, accusing them of complicity in money laundering and of lacking transparency. At one point the French government advocated an international boycott of tax havens, arguing that EU banks should refuse to deal with them. As Chancellor, Gordon Brown led constant campaigns against tax havens, looking for new ways to raise revenue out of them.

Even the Vatican has joined the campaign. Pope Benedict XVI was reported last month to be working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust”, while the planned encyclical – the most authoritative statement a pope can issue – will denounce the use of tax havens and offshore bank accounts by wealthy individuals, on the grounds that they reduce the tax revenues raised for the benefit of society as a whole (although curiously the Vatican hasn’t reacted so well to proposals by the Italian government to curb the Catholic church’s own tax break).

But instead of attacking tax havens, other countries should be trying to learn from them. The way they lead the global wealth rankings is testament to the power of lower taxes to raise overall living standards. The Bahamas manages to be far richer than any of its neighbouring Caribbean islands, Luxembourg is wealthier than France or Belgium, while Jersey has pulled well ahead of near-by Britain.

Of course, you can object that these are all tiny places, with minuscule populations floating on top of an ocean of tax accountants and brass-plate companies. There is some truth in that. But the list also includes low-tax nations such as Ireland, Hong Kong and Switzerland: all mid-sized trading territories which levy significantly lower taxes than most of their rivals.