Can any of you shed light on these reader questions about tax havens? The US tolerance for tax havens is puzzling, given that the US taxes citizens on their income earned anywhere in the world, and takes a dim view of foreign bank accounts (I am under the impression the rules have been tightened even further since then, but as of 2004, having more than $10,000 in a foreign bank account was asking for perma-audit).
I’ve been thinking more about the offshore tax haven system, and here are some
(1) I can’t think of a minimally plausible justification for the offshore system. For instance, Willem Buiter has said the obvious, “Blockade the tax havens.”
However, I have heard little talk about regulatory reform addressing this issue, which is bizarre for political reasons: What could you possibly say publicly about your reasons for being against money laundering and tax evasion? Taking up the issue would seem an obvious winner.
(2) Already in 1994 (per Frank Partnoy’s FIASCO) Wall Street was heavily into the use of tax havens in order to construct derivatives. Quite a bit earlier (around 1980) Citi got nailed by a whistleblower for using offshore accounts to evade taxes (I think they paid a tiny penalty). When did the US financial system first become inextricably intertwined with secrecy jurisdictions?
(3) It appears that the US had laws against being able to incorporate, etc., off shore until the late ’60s, and then the laws were dropped or weakened. Who lobbied for that? Why?
(4) CDOs were typically companies incorporated offshore. Why would they have been illegal if incorporated in the US?
Yves here. Perhaps I am too conspiracy-minded, but my theory is: there are no doubt people that governments want to transact business with in ways that cannot be traced, and sometimes the amounts must be so large that suitcases with cash are a bit awkward (think arms merchants and mercenaries). So you need a secret banking system (as in not subject to political scrutiny) that is still somewhat reputable (as in funds deposited there will be there in five years). So some jurisdictions are allowed to be in the business of having said banks. They therefore have to be permitted to conduct other business to mask the reason why they are tolerated (as in the tax haven status is a by product).
The problem is that this theory is unprovable (as in even if it were true, no one with inside knowledge would be permitted to reveal the real reasons). So I suspect other theories have at least as good explanatory power and some evidence in support of the theory.