If Everyone Is a Tax Haven, No One Is

The European Green Party today labeled the United States a tax haven, particularly singling out the states of Arkansas, Colorado, Delaware, Indiana, Iowa, Maryland, Michigan, Mississippi, Missouri, New York, Ohio, Oklahoma, Pennsylvania, and Virginia. That’s a lot of states, places that most just consider ordinary areas in which to do business.

The Tax Justice Network also publishes a list of tax havens. These include places like Panama and the Cayman Islands, but also countries like the United States, the United Kingdom, Japan, and Germany. Those countries are quite large and include about 40 percent of the entire world’s economic output. Those are also considered by most as ordinary areas in which to do business.

There’s obviously a problem with the way that the word “tax haven” is used; rather than being a unique characteristic of a handful of places, it seems to just be a general word to describe every single consequential government on the planet.

So how did we get to this point? Well, the example of the European Greens holds some clues. They’re not upset that Virginia is failing to enforce Virginian law, or even that it’s failing to enforce U.S. law. They’re upset that Virginia is failing to facilitate the enforcement of European law.

One can argue over whether or not the European laws are good for Europe, or even whether or not they’re good for Virginia. But the basic problem here is that the Virginian state government’s teleology simply doesn’t have anything to do with directives from Brussels. People in the Virginia statehouse are concerned with what their constituents want, not what parties across the ocean want.

A computer scientist might recognize that expecting all governments to help all other governments enforce their laws is a problem that doesn’t scale. They’d say it is “quadratic” in the number of sovereign governments around the world. What that means is that as the number of governments around the world grows, the complexity of the system grows even faster. Each time you add a new jurisdiction, it doesn’t simply have to create its own laws. It also has to come up with a system to help enforce everybody else’s laws.

This is quite obviously unsustainable in a world with a couple hundred different tax jurisdictions, each free to enact its own vision of appropriate taxation. Of course there are going to be glitches in the system, but it doesn’t mean that my home state of Virginia is fundamentally crooked. It’s simply that every government in the world is being subjected to an essentially impossible demand.