Tax Havens Put EU States to Shame

Wednesday, January 31, 2018
The Cayman Islands offer probably the biggest tax loophole for individuals and multinational corporations. (Indian Money)

Ayn Rand has been credited with saying that the difference between the welfare state and the totalitarian state is a matter of time.

To most people, this is little more than high-pitch political rhetoric. To keen observers, however, it is slowly becoming reality.

The European Union has created a blacklist of 17 so-called tax havens. Another 47 countries and territories are on a “watch list,” a blacklist waiting room of sorts.

Michael Klein, editor of the Cayman Financial Review, succinctly explains the purpose behind the blacklist:

The EU claimed tax legislation, policies and administrative practices in blacklisted countries have caused or may cause a loss of revenue for its member states.

The political message is clear: Europeans should keep their money at home. Why? Because despite some of the world’s highest taxes, Europe’s welfare states are fiscally unsustainable, suffering from slowly worsening structural deficits. The Greek austerity crisis, while extreme, was only an outlying effect of mounting fiscal desperation in Europe’s political leadership.

Hostility toward low-tax jurisdictions can be explained in this context, but it is also important to keep in mind that antipathy toward competitive taxes is nothing new. Back in 2000, the OECD – a Paris-based, government-funded think tank – published a list of so-called uncooperative tax havens. These were countries and territories that offered a certain level of financial privacy, understandably attracting investors who wanted to keep more of their own money.

Such choices, however, did not sit well with some governments. Using the OECD to stigmatize low-tax jurisdictions and discourage emigration of labor and capital, political leaders in high-tax welfare states spent many years de facto forming a tax cartel. The "OPEC for politicians" has essentially created a consensus within member countries that the welfare state – inefficient and burdensome as it is – shall remain in place at all cost. With the new EU blacklist they are taking it up a notch.

There is more to come. In November last year the Swedish National Tax Agency presented a proposal for a tax on emigration. The purpose, as described by the agency, is to impose a new tax on capital gains that emigrants bring with them. Given the legal status of the proposal, it is likely that this tax will end up in the Swedish tax code in the near future.

It is not coincidence that the Swedish tax agency presents its emigration tax right when the EU announces its low-tax blacklist. In less than two decades, the campaign against international tax competition has escalated. What started out as name-calling low-tax jurisdictions quickly grew into a persecution-style increase in regulations and coercive attempts to end global financial privacy. Now a European democracy is on the cusp of creating an actual emigration tax to eliminate the advantages of moving your life’s savings abroad.

What is next? How far are the world’s welfare states willing to go to perpetuate funding for their egalitarian entitlement systems?

Was Ayn Rand onto something when she put the welfare state and the totalitarian state on the same sliding scale?

It is worth considering these questions against the backdrop of the world’s radical transformation since the end of the Cold War. Once the former Soviet-sphere countries made their transition from communism to liberal democracy, it seemed as though totalitarianism would be filed away in the more shameful annals of human history. Governments would no longer restrict people and their money from moving freely across the world. The European Union, the formation of which started only three years after the fall of the Berlin Wall, was sold as a guarantee for free movement of people, capital, goods, and services across national borders.

Yet now, in the face of true economic competition, the European Union is showing increasingly totalitarian tendencies toward those who offer better economic conditions than its member states. Apparently, the free flow of people and their money is only fine so long as it does not erode the welfare-state tax base.

In this way, the EU blacklist and the Swedish emigration tax ironically bring Europe full circle. The Soviet Union and its satellite states were all built on an ideology, a political construct aimed at fulfilling a set of collectivist ideals. The project to implement this ideology was so important that the will of individual citizens was ignored. It was ignored, in fact, to the point where government built a wall through one of Europe’s largest cities to prevent people from dissenting with their feet.

So far, Europe’s welfare states have not actually blocked the emigration of people and money. However, the slow increase in authoritarian rhetoric and legislation in response to international tax competition puts on display a mindset that is not entirely indistinguishable from that of the Soviet leaders. The ideology — the egalitarian welfare state — is so important that governments are willing to interfere with people’s choices of where to live, work, and invest.

If the blacklist does not stop Europe’s bleeding capital and productive citizens, is the Swedish emigration tax something for the entire union to apply? If that does not work, what is next?

How far is it really between the welfare state and the totalitarian state?

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Sven Larson, PhD

Sven R Larson, Ph.D., is an American political economist with 20 years of experience in public policy. He is a research consultant, legislative advisor and the author of numerous policy papers, referee journal articles and books, including The Rise of Big Government: How Egalitarianism Conquered America (Routledge, Oct., 2017). Follow @Larson4Liberty.