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
There are all sorts of different taxes and fees that could be used to fund operations. Many of the tax havens are tiny countries, so even a small tax on huge sums of money that dwarfs the tangible economy could support it, and many have things like strong tourism which is commonly taxed to shift tax burden away from locals (see Nevada and Florida having no income taxes)… taxes on hotel/resorts stays, cruise ship fees, casino profits, etc.
To take advantage of many tax havens, a person/company would have to do a lot of administrative and legal work. This typically only makes sense if there is a lot of income/assets (tens of millions of dollars) to shelter – otherwise the administrative costs outweigh the benefits.
The people and businesses administering this stuff are well paid and their income (plus sales taxes, property taxes, administrative fees etc) go towards government income. The idea is that if you shelter trillions of dollars, just a fraction of a percent of that is quite a large sum of money.
The US itself did not have an income tax through the first part of it’s history. The Constitution had to be amended to even allow it, in fact. There are tons of other ways of raising tax money. Tax shelters tend to be smalller countries which makes this easier.
Each country has its own tax code, so it is hard to generalize. One example country is the Bahamas. They have no income tax, or capital gains tax, but they do have property tax, import taxes, and VAT.
If a corporation officially moves (for financial purposes only) to a tax haven, even if they pay a low percentage of their income as taxes into the tax haven compared to what they would pay in other countries, the tax haven is essentially getting free money. Even if the tax haven takes no taxes at all, it can make money just on associated fees for what is essentially no burden to their economy. The corporation isn’t bringing employees to the tax haven, so the tax haven doesn’t have to build roads or housing for them, doesn’t have to build schools for their kids, doesn’t have to provide pensions for their retired workers. The tax haven just takes fees and shuffles paperwork.
In the Honour of Richmond, the Lord Earl was a merchant, so although he zero-rated his rents in many vills, he still made money by trading with his tenants and employees, as well as with foreign merchants.
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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