There are three ways they do this. All should be obvious to anyone who has studied economics. First, those who have done so will know that effective markets that allocate resources efficiently require what economists call ‘perfect information’. That means (absurd as it sounds) that everyone has to know everything about everyone else’s intentions in the market. Now, I admit, that perfect information never exists, simply because it is obviously impossible that it can. But what is true is that the closer markets get to fulfilling this assumption the more likely it is that business risk will be low. That’s because businesses will know who can, and cannot pay them for what is sold, and so avoid bad debt. And investors will also have the information they need on which corporations are good at using their capital, and which aren’t. What tax haven secrecy does is deny businesses and investors that essential information. The result is that risk goes up, and so the rate of return required on investments increases, which reduces the amount of investment that actually takes place, which in turn cuts productivity, and that reduces real wage rates, and so GDP, and the result is we all suffer as a result.
But that’s only the first cost that tax havens impose on us. The second is that tax havens create unfair competition between businesses. That is because some business will, as a result of their inability to access tax havens, pay tax and whilst their competitors who can use tax havens will not. This matters because to work properly markets require that all businesses compete on a level playing field. With tax havens in the mix that clearly does not happen. And that means that those that do not pay tax have an unfair competitive advantage over those that do. This means that they can either undercut their tax paying competitors on price or they can invest more out of their after tax profits, which will of course be bigger because little or no tax will be paid. The result is that the taxpaying businesses tend to disappear: they simply can’t compete. But that’s not how markets are meant to work.
Tax havens decrease investment because of risk, lower returns meaning less investment. But tax paying, which reduces returns on investment so much that only tax haven based businesses can complete, does not reduce investment, no sirree!
At which point economists are rolling in the graves they’re not in yet. Because the standard analysis, something which escapes Spud, is that taxes upon investment reduce the amount of it, to our general detriment.