The Morality of Tax Havens

by Erik Cleves Kristensen

No one, whether individual, government or society, has a moral claim on the wealth that someone else has produced. This fact has been missed in the choir of condemnation of individuals and companies who place their wealth in foreign ‘tax havens’. Instead of questioning why someone might not want to expose their wealth to potential exorbitant taxes in their own country, people are roundly attacked for doing something perfectly moral – protecting their wealth as they see best. There is more to the leak of the ‘Paradise Papers’ than may meet the eye.

With the continual growth of the state, we have long jettisoned the premise that a person’s wealth is their own to do with as they please. Now the government is the arbiter of what a large part of your wealth should be used for. When government runs out of money, as is consistently the case in South Africa, the demand on the private sector grows bigger and bigger. We are told that business must ‘come to the table’ and contribute more, while at the same time business is demonised.

It is no surprise that those who are taxed more heavily will attempt to protect what they have earned – after the barrage of revelations surrounding the Zuma administration, can we in good conscience demand that those who are productive, run businesses and accrue wealth, be forced to keep their money in the country?

Both politicians and business-owners are mentioned in the Paradise Papers. It is interesting that we condemn both groups for tax evasion. One group contains people who made their wealth through growing businesses, employing people, investing in all types of sectors, trading, and raising the living standards of countless people around them. The other group contains people who ‘made’ their wealth through shadowy deals, cutting corners for government contracts, and using government force to compel others to do business with them. To place in the same bubble people who make wealth through voluntary trade as those who use force to get deals done, is the worst kind of moral error.

We love to call for higher taxes, to rail against inequality, to tell poorer people that their hardship was caused by the big bad man in the suit driving his Mercedes through Sandton. But when we call for higher taxes, we fail to mention that the taxes taken will not come “out of their consumption expenditures, but out of their investment capital” as Ayn Rand explains in “The Inverted Moral Priorities” from The Ayn Rand Letter. Thus, higher taxes mean less investment, which means fewer jobs, lower production, and higher prices.

Why higher prices? Because the businesses being taxed have to make up the hit somewhere, somehow, and the consumer is the one who will feel the slow, steady squeeze down the line. By the time that we’ve brought the rich down to an acceptable level, the standard of living of those lower down the rung will have been wiped out.

The vast majority of people agree that we ought to pay our taxes. But when we repeatedly see how corrupt and wasteful the government is, there may well be a line in the sand that, once crossed, enters the realm of government overstepping its bounds. When you see that the company you invested in is taking a nosedive, you divest and look at other options. The government must make the best possible case as to why you should invest in the country, even if that investment takes the simple form of taxes.

The consistent growth of government means that there are a myriad taxes imposed on both individuals and companies. There is a lot more at work than just an income tax, for example. The more wealth you create, the more you are punished for it.

It will be a lot more productive to combat corruption and lower taxes, thereby encouraging more and more people to pay their taxes in the first place. Shouting at the few productive rich who manage to protect their wealth before someone can steal it will not result in anything tangible. Instead of attacking tax havens we can render them pointless if we make South Africa the best place in which to invest and build businesses.