The Second War Between the States: How the United States Became the World’s Best Tax Haven

Abstract We want government to help us prosper. For working people, prosperity requires employment and employment requires business. After World War II, most of the world was either devastated or underdeveloped leaving the United States without foreign competition. Local competition took its place. The States and local governments competed against one another on their natural resources, access to transportation, infrastructure, schools, and work force. These are the products of government spending. Some States did not have much to attract economic development. They created their own attributes instead. For example, right to work laws attracted companies that wanted to avoid unions and no usuary limits attracted credit card companies who wanted to charge high rates. Other States offered tax holidays. Move here and pay no tax for ten years. But saving money in taxes lost its appeal when other jurisdictions offered even more. Rather than build good sewage systems or roads for everyone, towns provided free infrastructure built to company specifications in addition to tax incentives. By the 1970s, firms learned that they could get States and localities to bid against one another. Each providing a package of bigger incentives. We can see the result of these races to the bottom in cities and towns that gave companies whatever they wanted only to find themselves with vacant factories and roads leading to nowhere. While the States were competing with one another, the rest of the world was emerging from war. Like the States, these countries wanted to help their citizens prosper. For those without natural resources or great infrastructure or educated workers, one alternative was to become a tax haven. A tax haven is the other side of a tax incentive. With tax incentives, a government gives up the right to tax in the hope that a firm's relocation will bring its citizens success. In a tax haven, a government hopes to improve its citizens’ fortune by helping a foreign taxpayer avoid another government’s taxes. Whether tax incentive or tax haven, in the end, the result is the same. The stakes get higher and higher. The companies and foreign taxpayers move from site to site. They take everything they can get and then convince another government to give more. Now a decade of investigative journalism shows that not only are the States in race to the bottom with their own tax revenues, but they are also transforming themselves into tax havens thus helping foreign taxpayers deplete their home countries’ revenues. This paper is a cautionary tale. It shows what makes the United States the world's favorite tax haven and examines what we can expect if this trend continues.