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November 16, 2016

Regulators should treat tax havens “like the carriers of a dangerous disease,” says anti-corruption report

Economist Joseph Stiglitz has published a report calling for global powers to shut down offshore tax havens.

The report, prompted by the Panama Papers, calls offshore havens “co-conspirators” in crimes like tax evasion, corruption, and even child pornography. It says they should have a firewall built around them by the biggest global economies in an effort to choke them out.

“Regulators should treat secrecy havens like the carriers of a dangerous disease…They should be cut off from the global financial and economic system,” writes Stiglitz with co-author Mark Pieth. The goal should be to force reforms in, or at least seal off, any countries or jurisdictions that refuse to open up their financial systems.

Recommendations include each country setting up a public, searchable registry with the names of the directors and beneficial owners of companies incorporated under its jurisdiction as well as publishing information on the beneficiaries, creators, and administrators of any trusts within their borders.

The authors warn that secrecy havens can lead to societal breakdown by allowing people in developed and developing countries to “get a free ride from public education, health care and infrastructure without paying their fair share.”

Friedrich Schneider writes about the societal effects of corruption in his article Does corruption promote emigration? He says “corruption increases emigration among workers at all education levels by eroding living conditions.” The emigration of highly-skilled and highly-educated workers, in particular, reduces a country’s growth prospects and can lead to a vicious cycle.

Dominik H. Ernste has written about The shadow economy in industrial countries for IZA World of Labor. He says, "A heavy tax and regulatory burden results in higher growth of the shadow economy, which reduces government revenue and intensifies pressure on public finances…Ultimately, this may lead to rising tax rates in the official sector, which creates even stronger incentives to participate in the shadow economy." He suggests that fighting corruption by increasing transparency will reduce the incentives to work in the shadow economy and strengthen loyalty toward the state in ways that intensifying the controls and raising fines will never do.

Read the report on Overcoming the Shadow Economy here

Related articles:
Does corruption promote emigration? by Friedrich Schneider
The shadow economy in industrial countries, by Dominik H. Ernste

Tax evasion, labor market effects, and income distribution, by James Alm 
Explore more IZA World of Labor content related to the shadow economy