Ten Truths About Tax Havens: Inclusion and the "liberia" Problem

• Citation: Vol. 70 No. 7
• Publication year: 2021

Ten Truths About Tax Havens: Inclusion and the "Liberia" Problem

Steven A. Dean

Attiya Waris

TEN TRUTHS ABOUT TAX HAVENS: INCLUSION AND THE "LIBERIA" PROBLEM

Steven A. Dean^* Attiya Waris^**

Abstract

There has been a decades-long effort to repair an increasingly fragile international tax system. One reason it has foundered has been what we identify as the "Liberia problem." In 2000, the powerful Organization for Economic Cooperation and Development identified Liberia—but not Switzerland—as a tax haven and targeted it for sanctions. It did not go well. During the two decades since, everything has changed; yet seemingly from this lens of inclusion, nothing has changed at all. Awkwardly similar "blacklists" still target "Black" and "Brown" jurisdictions despite the fact that experts mean something quite different when they speak of the "scourge of tax havens" and secrecy jurisdictions. We think differently in important respects but believe that those real disagreements demonstrate the need for a less insular global tax policymaking apparatus. And we share a conviction that a more inclusive and more level playing field in the international tax arena would benefit all states. To show why, we offer a series of "truths" designed to prompt a long-overdue conversation about perceptions of bias and privilege in international taxation.

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Introduction...........................................................................................1661

I. What Is a Tax Haven?.................................................................1664

A. Truth #1: Tax Havens or Secrecy Jurisdictions Will Probably Always Exist ........................................................................... 1664
B. Truth #2: Tropical Tax Havens Do Not Matter Much............ 1667
C. Truth #3: The United States Has Become a Superhaven........ 1668

II. Privilege and Tax Havens..........................................................1670

A. Truth #4: The Global Southern Strategy Tells a Culture Story ........................................................................................ 1670
B. Truth #5: Privilege Matters in International Tax................... 1672
C. Truth #6: The Culture Story of Tax Havens Caused a Lost Decade in International Tax Policy........................................ 1674

III. Distorted Policies.......................................................................1676

A. Truth #7: Fencing Taxpayers in Proved to Be Easy............... 1676
B. Truth #8: Minimum Taxes Punish Difference ........................ 1679
C. Truth #9: A Preoccupation with Punishing Tax Havens Distorts the International Tax Policymaking Agenda ............ 1681
D. Truth #10: Inclusion Is a Powerful Tool and International Tax Must Learn to Wield It..................................................... 1683

Conclusion...............................................................................................1684

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Introduction

For decades, tax havens¹ or secrecy jurisdictions have been presented as an existential threat to the modern state.² For many, a familiar racial subtext of Black lawlessness and white privilege both come into view and fall apart upon close examination of that narrative.³ Less wealthy tropical tax havens loom large in the popular imagination, but in reality they pose a limited threat to wealthy states.⁴ Yet "blacklists," such as those published in 2000 by the Organization for Economic Cooperation and Development (OECD) and in 2020 by the European

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Union, target states like Liberia and Trinidad and Tobago.⁵ Whiter, wealthier states like Switzerland and Luxembourg do not appear on such lists.⁶ Others like Hong Kong, Singapore, Mauritius, or Seychelles seem to drop on and off the radar with apparent ease.

This Essay offers ten provocative "truths" designed to highlight perceptions of bias that fuel global inequality, distorting international tax policies and priorities. International tax law may seem an unlikely place for the dog-whistle politics of race and discriminatory exclusion, yet its preoccupation with preserving the market from perceived threats lends itself to fears of lower class or racially charged lawlessness.⁷ A structure tainted by perceptions of bias has been increasingly challenged as more players emerge and more developing states become more politically assertive and astute, offering an opportunity to build a more inclusive international tax system.

By 2000, it had become clear that the international tax system designed by the League of Nations suffered from grave flaws, jeopardizing the wellbeing of both rich and poor states. Rather than looking inward to identify the source of the problem, the leading global tax policymaking organization concluded that states like Liberia—"behaving like gangsters"—were to blame.⁸ The fallout from what many perceived as a discriminatory and racially tainted blacklist caused a lost decade in international tax policy and still distorts policymaking.

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Naming and shaming this one country while allowing numerous others to be excluded in that statement highlights the impact a lack of inclusion continues to have on global perceptions of those wielding power in international tax policy circles. What causes us even more grave concern is the impact those perceptions have on those excluded from the international tax policymaking process because of the color of their skin, their gender, or their country. Watching an elite within the OECD and the European Union continue to shape the global policymaking process as developing states struggle to build the capacity of their taxpayers does not suggest a bright future for the international tax system.⁹

Part I explores complexities of the term tax haven or secrecy jurisdictions. Truth #1 explains why tax havens will always exist. Truth #2 shows why, the islands by themselves, however firmly fixed in the public imagination as the quintessential tax havens, do not matter very much in practice. Truth #3 observes that the United States has gone a long way toward becoming the tax haven of tomorrow—it is a case of David and Goliath where Goliath may be winning.

Stubborn facts of inequality, racism, and privilege have kept outdated perceptions alive, stifling efforts to address persistent problems of inequality, racism, and privilege.¹⁰ Oppression pervades the system and, if not understood and unpacked as well as progressively highlighted and deconstructed, it will continue to maintain the status quo and undermine the path to a fair and just global fiscal system. Part II reveals how the fight against tax havens has come to be seen by many as a racialized system of control. Truth #4 describes a Global Southern Strategy in historical context, explaining how it anticipated the nativism that has come to define the politics of our era. Truth #5 shows how a perception that white privilege allows some tax havens to avoid the label has grown entrenched. Truth #6 highlights the consequences of the collision between race and inequality in the fight over tax havens, showing why such perceptions matter.

Part III explains why inclusivity matters in international taxation today. Truth #7 shows how inclusivity helped the U.S. Foreign Account Tax Compliance Act (FATCA) target offshore tax evasion more effectively than

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naming and shaming. Truth #8 highlights how the U.S. Global Intangible Low-Taxed Income (GILTI) regime penalizes innocent states in its effort to punish the guilty. Truth #9 shows how a retributive emphasis in international tax policy—often driven by non-tax concerns—favors relatively wealthy states.

Truth #10 reveals that inclusion must be broad and deep. A system dominated by men with women slowly entering the space underscores how the architecture of the international tax system stymies inclusivity along other lines, including gender. Achieving a fiscally legitimate international tax system demands that we address the international tax system's Liberia problem. We hope that this represents only the beginning of a conversation about how to make this policy space more inclusive for all.

I. What Is a Tax Haven?

A. Truth #1: Tax Havens or Secrecy Jurisdictions Will Probably Always Exist

Tax policy remains primarily a matter of domestic politics. As a result, states inevitably pursue different approaches to similar challenges. To borrow Michael Graetz's words, "[t]he freedom and independence, as well as the economic welfare, of people varies from nation to nation. This simply is fact. In the absence of a world government, this is how it must be."¹¹ Even if each state started with equal resources and a blank tax policy slate today, tax laws and policies would vary greatly from place to place.

Because "[t]he pattern of taxes in different countries varies, reflecting such factors as economic structure, history, and the tax structures found in neighboring countries," conflicts inevitably arise.¹² As a result, "[t]he central challenge in international tax is navigating the relationship between an individual country's tax system and the rest of the world."¹³ Both the broad contours and the finer details of tax laws reflect the fact that "countries may attach different importance to such commonly accepted characteristics of a good tax system as fairness, economic effects, and collection costs."¹⁴ The substantive differences this produces from state to state can be subtle or stark.

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When countries resemble one another, their tax laws might run largely parallel with relatively minor differences in the definition of the tax base. For example, the United States and Japan have much in common both in terms of their economies and their tax laws.¹⁵ Despite their many similarities, opportunities for "international tax arbitrage" grow in the inevitable cracks between even such closely matched tax regimes.

Diane Ring offers an illustration of a substantive tax advantage derived from a loan...