If individuals and companies don’t have to pay any tax how does the government make money for general upkeep of the national infrastructure and to pay government salaries?
In: Economics
Most of the posts here have nothing to do with how tax havens actually work. Almost every tax haven has a 0% corporate income tax, because otherwise why would you choose that tax haven? You’re already offshoring, you might as well go for it all.
There is one thing to keep in mind for a tax haven: once the money goes into the tax haven, it can’t come back to the US. It has to stay in the tax haven, because once it leaves it gets taxed. So it has to stay in the tax haven.
These tax havens then have a unique trait: a whole bunch of cash that is sitting on their island (metaphorically, of course), so what do you with a whole bunch of cash? You start a bank, or more broadly a financial services sector. The hardest part of starting a financial services sector is having the capital to back it up.
Nobody is going to capitalize a bank otherwise, but if they offer 0% corporate taxes and the cash can’t leave the island without paying taxes on it, suddenly the island has a sticky base of “Tier 1 Capital” to use. Now these banks can lend against it.
Who would want to borrow from these banks, you ask? All of the companies with cash stored on the island. The way you USE the money that you’ve dumped into a tax haven is to BORROW against it, since loans are taxed differently than cash.
So now these small nations – Caymans, Switzerland, Singapore, Bahamas, etc. – have small populations that mostly work in financial services, and therefore rack up huge GDP per capita.
The next logical question is, why don’t more places do this? Well, once somebody has the reputation, talent base, capital, political stability, etc. already baked in, it’s going to be really hard to be the scrappy startup since you can’t compete on price. That’s why Ireland went so hard to be the tax haven for the Euro. And it’s worked really well.
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