'Panama Papers' Underscore the Crucial Importance of Tax Havens
USA Today described as "jaw-dropping" Sunday's "Panama Papers" revelation about a "global network of offshore companies helping the wealthy hide their assets." The less emotional among us should greet the news with relief. When the "wealthy hide their assets" they're shielding crucial growth capital from the wasteful hands of politicians.
That many politicians and dictators apparently have money in offshore tax havens will be addressed in a bit, but for now we should celebrate the billions parked offshore. Supposedly the "Panama Papers" investigation revealed that at least 29 Forbes 400 billionaires had accounts in countries pejoratively described as "tax havens." The global economy is better off to the extent that what's been found out is true.
That is so simply because wealth saved in offshore accounts is not wealth that sits idle. The offshore banks and various funds that the rich deposit their money with don't pay them interest on it so that they can stare lovingly at the money of billionaires. Instead, they pay interest on the deposits of rich people so that they can quickly lend and invest them globally with an eye on achieving even higher returns.
So while readers can expect all sorts of commentary about the rich essentially burying their money under the proverbial tax-haven designed mattress, the actual truth is that the more the world's superrich are able to shield their wealth from the tax man, the better the odds we all have of accessing the savings of the superrich. When the rich get to keep their wealth, we have immediate access to it through loans and investments in the ideas of today and tomorrow. Put more simply, what the rich keep from the government is wealth that is immediately spread around among those who aren't rich.
The above truth is the source of the famous line telling us that the "rich get richer." Yes they do if their savings are invested wisely; investments the source of all company and job creation. Excitingly for all of us, the more that tax havens can help the rich shield their wealth from politicians, the more company and job creation there will be.
Conversely, the majority of us who aren't rich will be rendered worse off to the extent that "jaw-dropping" news about tax havens leads to global crackdowns on same by errant politicians. We know this firstly because investment is once again the source of the job creation we all desire in abundance. To the extent that politicians can keep the rich from shielding their wealth from their grasping hands, there will be less investment as a result.
Second, we can't forget what rising tax revenues allow governments to do. Specifically, governments showered with lots of revenues are not only able to wastefully spend the rising cash inflows, they're also able to borrow with ease. High tax revenue countries are countries that can borrow aggressively, thus expanding the size and scope of government even more. Rising government revenues are surely an effect of economic growth (including growth wrought by tax cuts), but those same revenues also dampen future growth given the certain truth that politicians will always and everywhere dream up new ways to spend the money on impossible-to-sunset new programs.
Indeed, as Randall Woods points out in his new book Prisoners of Hope (about LBJ's myriad and very expensive governmental initiatives), President Lyndon Johnson was only able to launch the failed "War on Poverty" insofar as the 1964 income tax cuts gifted Treasury with $7.5 in extra revenues. Tax cuts are great, but their greatness is surely neutered by rising revenues as politicians inevitably spend them on programs that grow and grow. Politicians exist to spend, and their largesse exists as a tax on the real economy. This speaks to another reason why tax havens are so crucial. It's very good for our liberty and our personal economy when politicians have less wealth to destroy.
All of which brings us to revelations about various politicians and dictators having wealth (much of it likely ill gotten) similarly deposited offshore. In isolation, this is once again a good thing. A dollar is a dollar, a euro a euro, and a ruble a ruble. The more wealth that is situated "offshore," the more wealth that is subsequently shielded from the tax man so that it can be invested in real ideas onshore.
At the same time it's hard not to be offended by news of politicians possessing far more wealth than these alleged men and women of the people generally let on. News like this should definitely offend us, but it shouldn't surprise us. Politicians get into politics and dictators lust for power so that they can get rich. The truly productive create actual wealth in the private sector, while the politics and power-minded attain wealth by getting into politics whereby they fleece the true wealth creators of their production. Politicians live very well in and out of office. Period.
If anyone doubts the above, they need only visit Washington, D.C. When government spending surges the political class located in our nation's capital is the biggest beneficiary. We should expect the same to be true in other countries. Government spending not only subtracts from economy-expanding investment, it also enriches those who spend money not their own. While no individual in a real economy comprised of individuals can credibly claim to be made more prosperous by nosebleed tax rates, the politicians doing the taxing and spending surely can claim they're made better off.
Back to offshore tax havens, they're a way for the actual producers of wealth to protect it from the politicians enriched by taxation. Let's celebrate and nurture tax havens with an eye on getting more of the world's wealth away from the political class, and back into the savings and investment that make all the non-politicians (think the majority) better off.