Tax Havens, Trade-Offs, Offshore

As a fanatical supporter of American libertarian writer Ayn Rand, reading the newest book by Dartmouth’s own professor Brooke Harrington, Offshore: Stealth Wealth and the New Colonialism, helped me better understand myself and my political beliefs. In fact, I am now aware that, as Harrington would see it, I support “authoritarianism” and believe that “democracy is a failure.” According to her, we libertarians prefer authoritarian regimes where a class system is in place, and where there is no social mobility. 

A libertarian philosopher once wrote that “the 1920s were the last decade in American social history during which one could be genuinely optimistic about politics.” Why is that? Because, the libertarian wrote, “the vast increase in welfare beneficiaries and the extension of the franchise to women” have made it that way. Surely because the author cites one example, this must be true. Anyone who believes that a historical increase in welfare beneficiaries is a bad thing must also believe women should not be allowed to vote. 

Well, not quite. Ayn Rand surely didn’t believe this. And neither do I as one of her foolish supporters. In fact, in her masterpiece Atlas Shrugged, the protagonist was a woman who was empowered in a business role that helped stop the political and economic decline of the country. This wouldn’t have been considered very typical for a woman in 1957.

Harrington’s Offshore seeks to explain the offshore financial system. Her goal in her research was to “make sense of the political and economic inequality spiraling out of control worldwide.” While this claim is factually not true, she does spend her book rebuking any forms of wealth or income inequality (while pretending to be capitalist as she does so). The problems with the offshore financial system she properly identifies lack real solutions. Her book is ultimately a complaint about the fundamental principle of private property and independence. A better world for the author is seemingly a more equitable one, not a wealthier or more prosperous one. 

Harrington makes a few key points. First, the idea behind the offshore system is that businesses and individuals use residence and incorporation in offshore nations (the ones that act as tax havens) to escape the taxes of their home countries. She mentions Starbucks as having done this in the Netherlands. This is of course legal and is a byproduct of a sort of international capitalism. Businesses and the rich flee to where they benefit the most. 

Second, the offshore financial system can be used for a secret illegal flow of money. While the U.S. employs methods to prevent its own citizens from partaking in this, it will continue to happen in other nations that might not care to monitor their citizens. Harrington argues the secrecy that comes with the offshore system allows wealthy individuals and firms to avoid market correction. This is one of her valid points. She suggests that the secrecy involved with the system could be simply shut down, but that this won’t be done because of political conflicts of interest, which is true. The nations that benefit from this secrecy are not going to simply stop or go away. 

Next, the author argues this system is a form of new colonialism and that it is bad for the locals of the nations involved. However, this is not quite true. She points out the benefit that small countries have in partaking in the offshore system and incentivizing foreign capital. The British Virgin Islands reportedly attribute half of their GDP to offshore sources. The author lists plenty of small, once-poor nations that have chosen to benefit from this system. In fact, this system is actually decreasing inequality from nation to nation and is raising people out of poverty across the globe. This is, in fact, capitalism at work.

In her comparison of the offshore system to colonialism, she is correct in many of her comparisons such as the apparent lawlessness of these nations, but she ignores the fundamental difference, which is choice. Poor nations have chosen to engage in this system. It benefits them and is not happening from some oppressive regime, nor from an invisible class regime. As she states, the BVI are “said to ‘enjoy a standard of living far higher than on other Caribbean islands.’” Later in the book, however, she claims that the $1.5 trillion in assets of corporations in the BVI “has not yielded much benefit for the majority of the islands’ populace.” In her explanation, she attempts to make the offshore financial system seem like some parasitic system by claiming that BVI citizens must pay 12 percent in social security and payroll taxes, while Americans only pay 7.65 percent. 

I believe the author is trying to suggest that the BVI tax rate being different from the American tax rate makes the system somehow unfair. This is like comparing apples to oranges. Somewhere in this argument is a rip on the offshore system. The passage only leaves me jealous that the BVI locals don’t have to pay income tax on top of the aforementioned tax (unlike me and any American I know). 

Yet the author complains about inequality. While the offshore system has only helped to make the world a more equal place overall, within involved nations, inequality has apparently “skyrocketed” (the example given is the Bahamas). Assuming this is true, I would like the author to choose: Would we rather have an unequal and wealthier world, or a more equal and poorer one? I suggest she move to Cuba before answering that question. 

Assuming there is “no economic justification” of tax-havens and that “they just need to end,” this book leaves readers without an actual solution to abolish the offshore system. When she does provide solutions against the offshore system, these solutions rely on each individual country shutting itself down as an offshore power or increasing its own regulations. The example she gives is Israel, and she also mentions prohibiting wealth managers from working with sanctioned clients, like Russian oligarchs, in their jurisdictions. However, I sincerely doubt the BVI, Cook Islands, the Bahamas, or any other nation whose economy is centered on the offshore system would voluntarily regulate their own economies. The nations that have done this (Switzerland, the U.S., the nations of the E.U., and perhaps Saint Kitts and Nevis and Vanuatu) are, however, not the entire world and do not have the same political interests as all nations. Never will the world get along with sunshine, rainbows, and similar political goals.

In combating the secrecy that allows for illegal transactions and money laundering, the author suggests rewarding wealth managers for access to such secrets. Perhaps incentivization is an option. Assuming you can find this information, the author is correct in her statement that social stigma (a form of capitalism) will respond to this activity and help increase the risks involved with others participating in this system. However, the extent to which wealth managers would be willing to sacrifice their reputations and businesses for a one-time reward does not seem great. Ultimately, we are left with no real or solid solutions to the issue of offshore finance (in terms of eliminating tax havens or exposing criminals).

What we are left with is the author’s frustration. In her remarks on the state of the world, she mentions how frustrating it is as a citizen in a Western democracy who pays their taxes, while the quality of governmental services plummets. It goes to show how increasing taxes to transfer the wealth of citizens into the corrupt and inefficient hands of the government is not a good thing. Rather, she suggests that this is the result of the offshore financial system. The modern world is a colonial one, with an invisible colonizer, the upper class. This class steals from the poor. And it’s all being done through the means of taxation! I agree with the author completely. In fact, we ought to revolt against this system until our taxes are lowered and we don’t have to rely on the government controlling our wealth to have access to services. 

Ultimately, the author paints the unfortunate reality of the world: one filled with unfortunate tax havens, secret illegal offshore business dealings, and wealth inequality. Well, what do we do about it? Being that the author has no solutions, there is not much that seemingly can be done (on top of what the U.S. has already done to mitigate illegal activity). While we can complain about the offshore system all we want, the country ought to spend less time focusing on the rich, and more time focusing on the poor, the working class, or simply the 99.9 percent of Americans who are not ultra-rich. 

Questions we ought to be asking include: How do we allow for social mobility while allowing tax rates to be low? What services are best left to the private sectors? How can we fix the horrible welfare or social security systems while still maintaining a social safety net for those who truly have no other options? The majority of Americans don’t care that Elon Musk has a superyacht or a private jet; they just want what’s best for them. “Inequality” is simply the price to pay for progress and prosperity.