theMarketSoul ©1999 – 2010 Ventures an opinion on the ‘Economics of Taxation’

[All names and references to places in this post has been changed, so as to protect the innocent bystanders].

Cracking down on ‘Tax Havens’ became a stated objective of the G20 last year during one of the meetings held during 2009.

Lets us keep the argument very simple and divide the world into two colours namely magnolia and chocolate brown (close enough approximation of two other colours normally used in arguments), or rather more accurately the regulated world and the unregulated world.

If it is regulated, it moves slowly, is a target and gets nailed very quickly.  The credit quake of 2008-2009 resulted in the implosion of this world, which today moves even slower, with a catastrophic collapse in taxable revenue and actual tax take an unfortunate consequence.

So, as our hypothetical magnolia world has ceased up almost completely, the G20 thought it right and proper to start targeting the chocolate brown world.  This is the ‘dynamic underground’ of slush funds, oiling the cogs of industry, money laundering, crime, drugs, terrorism and anything that moves outside of the regulated world arena.  Apparently this world is alive and well, with cash sloshing around the system that unfortunately does not hit the regulated world’s sides and filters, and is therefore not siphoned off as ‘direct’ tax flows and revenues.  If your jurisdiction has indirect taxes, then this cash does get siphoned off, as goods and services are also consumed by the chocolate brown world.

Now if you view these two worlds as two balls or circles, the magnolia one is shrinking and the chocolate brown one is growing in size.  So the question really becomes this:  Which one do you attack?  How do you appease the populist vote?  For one of the choices is:  “Tax ‘em to death”, because you are already taxing ‘em pretty harshly! (Those living in the magnolia space).  Alternatively, you grab the populist media’s h(d)eadlines and attack Tax Havens with the natural association of the chocolate brown world with ‘dirty’ cash.  This way you score two potential hits:

      (1)    Populism on your home turf and

      (2)    capital flight from tax havens. 

This is a great tactic if you believe that the ‘Economics of Taxation’ mean that you either tax the flows of money or the stock of money (capital and other ‘fixed’ forms of property).  Flows of money include indirect taxes and maybe this scare-mongering’ tactic does encourage capital movements between jurisdictions, however, as a general approach and tactic to attack Tax Havens, I believe this is doomed to fail.

Tax jurisdictions, fiscal policy and ‘one-upmanship’ is a national and international ‘sport’.  Therefore,  we can’t have the big boys and girls getting upset at the little boys and girls, just for trying to scrape together a few crumbs off the BIG table, in order to survive, can we?  A sense of  fairness and  a measured and proportionate response is definitely called for in this so-called ‘war on tax havens’. Or am I wrong on this call?

theMarketSoul ©2010