The following guest analysis is from DePauw University Intercollegiate Ethics Bowl team member, Marko Mavrovic. If you or your team would like to author a guest analysis on either an IEB or NHSEB case, we’d be pleased to share it. Scroll down to review which cases have already been covered, and email matt (at) mattdeaton.com to confirm the submission details. And thanks for leading the guest analysis charge, Marko!
Criminal individuals and corporations utilize the secrecy and fiscal leniency of small island tax haven nations to store their illegally-obtained assets. Some of these assets have been gleaned from developing countries via various means. Given this, the connection between tax haven nations and the further impoverishment of developing countries warrants closer inspection.
What is the Connection? Developing countries receive official development assistance (ODA), which is foreign government aid designed to promote the economic development and welfare of developing countries. Despite receiving an estimated $1.3 trillion in ODA from developed countries in 2012, developing countries saw nearly triple that amount flow out in the same year, indicating that the already impoverished developing countries are losing money. One of many sources of this outflow is unrecorded and usually illegal “capital flight.”
Capital flight refers to when money or assets of its citizens/residents, assets that would be subject to taxes, flows out rapidly from a country. Foreign and domestic corporations that contribute to capital flight use a practice known as “trade misinvoicing” to evade taxes, launder money, and circumvent restrictions on capital. Money laundering refers the process of concealing illicit money by ostensibly “transforming” it into legitimate assets. Often these corporations and individuals house their illicit assets in tax haven countries, such as the British Virgin Islands.
Tax havens are characterized by lax domestic policies and sometimes a lack of transparency. It is asserted that this illegal capital flight would be unable to occur without tax havens. Tax haven countries, due to their domestic tax policies, may inadvertently be contributing to the massive outflow of money from developing countries and incentivizing financial criminality. Herein lies the main moral dilemma: Due to their indirect but adverse effect on developing countries, tax haven nations may be unethical.
There is nothing inherently morally bad about the existence of countries with lax domestic tax policies. While the criminal corporations and individuals utilize the tax havens for their illicit assets, the tax havens themselves are not criminal nor exclusively used by criminals. It is simply the country exercising their sovereignty over domestic policies. However, these tax havens are portrayed in such way that makes it appear as though they are integral to the illegal capital flight, yet the criminal act has already occurred prior to the assets arrival in whatever bank in Guam, Isle of Man, Bahamas etc. Tax havens are not a necessary feature of the illegal capital flight. If tax havens did not exist, deliberate misreporting of capital would likely still take place. Money laundering would still take place, too. In fact, money laundering occurs within countries when illegal assets are funneled into legitimate businesses. Capital flight from developing countries would also still take place as many criminals funnel the assets back into their home country, too.
There is no direct connection between the continued impoverishment of developing countries and the existence of tax havens. The connection is indirect. Moreover, tax havens do not contribute to the outflow of money from developing countries. Some may argue that tax havens are incentivizing financial criminality, but they are not. They are merely incentivizing the movement of capital to their country by possessing tax rates that comparatively lower that than of the country in which the capital currently resides. Tax haven nations themselves are not moving money from developing countries, they are not mandating debt or interest payments, they are not repatriating back home investments made in developing countries, and they are not “reporting false prices on their trade invoices.” All of these actions are the main contributors to the extremely high capital outflow experienced made by other agents. The attention should instead be placed on those who engage in trade misinvoicing, money laundering, and other illegal activity that is detrimental to the development of developing countries.
Do individuals and corporations have a moral obligation to pay taxes in the country of their citizenship? In many cases, it is not criminals but law-abiding individuals who move their assets to tax havens. In doing so, they fail to contribute to the country of which they are a citizen and the country in which they made their money. Yet it is a rather common occurrence for a citizen of one country to move or spend their money in another country. International tourists do this all of the time! This movement of capital is a product of a more interconnected world in a time where travel is easier and national borders are more permeable to the movement of people and goods. This can and should be taken advantage of on the basis that individuals should have personal financial liberty. But the argument can be made that this “principle” of personal liberty does not outweigh a greater obligation to assist one’s own country (via the payment of taxes), especially if that individual is reaping the benefits of the tax revenue (i.e. infrastructure, education, healthcare, etc.)
Is It morally permissible for tax havens to have such low taxes? As argued above, tax haven nations are simply exercising their sovereignty over domestic affairs when they develop a tax policy. It can be argued, too, that a country’s first and primary obligation is to welfare of their own people. Considerations of the effect of their policies on other nations should only be accounted for after the best interests or desires of the nation are met, if accounted for at all. Many tax havens have democratic regimes, which reinforces, at least ideally, the notion that these tax policies are being developed in the interest of the people.
Ethical Obligations in International Relations: As it pertains to this case, some could argue that there are a few obligations of countries when interacting with other countries. The first is that developed countries have an obligation to assist the development of developing countries. This obligation is due in part because of abundance of resources of developed countries. Another reason is that the stability of developing countries, which likely can only be achieved by the generosity or aid of developed countries, is beneficial to all countries.
The second obligation is to avoid infringing upon the sovereignty of other nations except for in extraordinary circumstances. For example, demanding that a tax haven nation change its tax policy would constitute a violation of a country’s sovereignty. But there are situations in which that infringement may be permissible, such as when country A poses an imminent and real threat to the national security of country B. If the argument can be made that tax havens are directly threatening the national security of a developing country because of their policies, it may be enough to compel tax havens to no longer exist.
— Marko Mavrovic