By Daniel Altman
Herald Tribune

Secret bank accounts, millions of dollars paid to informers, governments at each other's throats - the recent scandal involving German tycoons and their supposedly tax-dodging accounts in Liechtenstein has supplied some juicy intrigue. But behind the splashy headlines lies an economic story that may surprise you.
There is no official way to define a tax haven, but Liechtenstein fits into a class of countries that the governments of major economies have come to dislike. They have low or no tax rates for corporations, they offer secret banking services and, in some cases, they don't seem to mind too much if money-launderers and other undesirables are among their clientele. They are also becoming more prominent in the global economy, said Grace Perez-Navarro, deputy-director of the Center for Tax Policy and Administration at the Organization for Economic Cooperation and Development in Paris.
"Are they more popular, more useful, more dangerous? They're probably all of those things," she said. "Back in the day, when you didn't have the Internet, you had people carrying suitcases on a Pan Am flight to a European tax haven. Now all that's changed." Tax havens are no longer just for the wealthiest or shadiest characters from nearby nations, Perez-Navarro explained. Through electronic banking and credit card programs, they have begun to appeal to upper-middle-class professionals around the world. 

Our comment: The more governments in high tax nations seek to clamp down on their most productive citizens through redistribution of wealth, the more the smart money will flow offshore. Perhaps even more interesting, the smart people are following their money offshore, exercising the most direct form of democracy: voting with their feet. These days it is possible to create wealth offshore , rather than just using offshore banks as a place to hide money or protect assets. A new range of 'ideas businesses' are creating a new range of opportunities for individuals with enough initiative and entrepreneurship to get up and go!

Indeed, Liechtenstein isn't accused of sheltering gun-runners or terrorists in the most recent scandal, just some wealthy, tax-dodging Germans - and, in the latest news, some Britons as well. The German and British governments paid huge sums for banking information, possibly stolen, that may reveal the identities of those tax cheats.
Of course, those governments would prefer not to have to use backhanded methods to track these folks down. They might like to see an end to tax havens - no more revenue escaping their treasuries, and fewer tax-haven-abetted corporate frauds like the ones perpetrated by Enron and Parmalat. But would that really be in their best interests?
Perhaps not. One argument, a favorite of advocates of small government, is that tax havens put pressure on other countries to keep tax rates low and regulations light, in addition to starving the authorities of tax revenue that would just be wasted. Another theory, which doesn't require a political imperative, comes from Mihir Desai, a professor of business administration at Harvard University: Tax havens may actually bring business to nearby economies.
"The presence of a nearby tax haven can actually generate more activity in the non-haven," he said. "The intuition is, 'Are you more likely to locate in Germany if you know you can use a nearby tax haven to reduce the cost of capital?' "
Cutting the cost of capital in a multinational company means, in part, avoiding taxes on profits. One way is to buy and sell assets between divisions. Certain "intangible" assets, like patents, don't have well-defined prices. So, a company can set any prices it wants to siphon money from one division to another, perhaps from a non-haven country to a tax haven.
A recent paper co-written by Desai suggests that multinational firms do take advantage of this economic symbiosis: Higher economic activity in a tax haven is associated with higher activity in nearby non-haven countries.
Along the way, the tax havens themselves can get rich, Desai said, sometimes even becoming talent centers for financial services and other industries along the way, as Bermuda has. So why aren't there more of them?
One reason may be increasing returns to scale; one big tax haven is likely to be more economically efficient than two small ones, according to Desai. And not every little country, Perez-Navarro added, has the legal framework that international investors and multinational companies seek.
Perez-Navarro said the OECD didn't want to put tax havens out of business, just to pressure them into adopting more effective and transparent regulations. As the case of Liechtenstein shows, however, sometimes peer pressure may not be enough.