What Tax havens have done for you and me. Or have they?

sunny dollar sign

There is a fine line between between privacy & secrecy, particularly when it comes to finances.

In the UK, we’re really squeamish about financial revelations even on the most personal of levels so it makes perfect sense that we do the same for our businesses but is that right? An article today by Oxfam claims  that 300 of the World’s leading Economistshave said that Tax havens serve no useful purpose and have written world leaders warning there is no economic justification for allowing tax havens and urging them to lift the veil on offshore secrecy. The letter comes ahead of the Government’s anti-corruption summit in London on Thursday, which politicians from 40 countries as well as World Bank and IMF representatives are expected to attend.

Whether you’re for or against tax havens, there are arguments supporting both sides not least the concept that havens enable high-tax countries to impose lower effective tax rates on highly mobile firms, while taxing immobile firms more heavily which then benefits employees or contractors.

Another interesting consideration is the effect of aggressive tax policies on markets around the world which Science Direct did a study on in 2009 but which seems as relevant today as ever. They studied the stock price reaction to news about corporate tax aggressiveness and found that, on average, a company’s stock price declines when there is news about its involvement in tax shelters.

They also found some limited evidence for cross-sectional variation in the reaction. For example, the reaction is more negative for firms in the retail sector, suggesting that part of the reaction may be a consumer/taxpayer backlash. In addition, the reaction is less negative for firms that are viewed to be generally less tax aggressive, as proxied by the firm’s cash effective tax rate.They interpreted this as being consistent with the market reacting positively to evidence that a firm is trying to reduce taxes when their financial reports would lead one to believe the firm is not tax aggressive.

Which suggests that Sir Phillip Green is actually doing us all a favour by languishing on a boat somewhere sunny. Well, it keeps him out of trouble I suppose, doesn’t it?

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