In the News

Tax Havens - a useful 'however' or 'depends on' argument in your macro answers

Jonny Clark

9th May 2016

This week sees an anti-corruption summit taking place in the UK where over 40 countries are sending representatives along with members of the IMF and World Bank to discuss issues highlighted by recent leaked documents from Panama. Today has also seen the publishing of an open letter from 300 eminent economists from around the world arguing that there are no economic benefits from the existence of tax havens (read the Independent article here).

Dr Ha-Joon Chang from the University of Cambridge, has been quoted by the BBC as saying that he shared "the view that tax havens serve no useful purpose. These tax havens basically allow companies and certain individuals to free-ride on the rest of humanity.

"These companies and people make money in one country by using workers educated with public money, using roads, ports and other infrastructure paid for by the taxpayers of that country and moving the money to another country in a shell company which doesn't really do any business there."

It struck me that the issue of tax havens may be a useful counter-argument for students completing evaluative points as part of their upcoming exams. Are the supply-side policies of Governments undermined by the fact that the public money used may used to benefit tax avoiding individuals or firms? Could fiscal policies aimed at altering aggregate demand prove less effective if firms find methods of preventing governments from bringing in sufficient revenues? How do tax havens hamper any policy aimed at improving equality within a country?

The letter makes an interesting argument. The signatories are not asking for the removal of tax havens but request greater transparency - a publishing of the details of the firms and individuals using the services of financial institutions in places such as the British Virgin Islands. With greater information, voters and policy makers are more able to decide what they think is an acceptable level of activity.

Jonny Clark

Jon Clark has been teaching economics and business studies for over 25 years primarily in the Further Education sector. Before joining tutor2u, he was a senior manager at South Cheshire College in Crewe.

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