some insight into US thinking on offshore financial centres, including Bermuda: Globalisation challenges governments in many ways: Capital flows buffet exchange rates, information flows weaken dictators, trade flows undermine nationalist industrial policies. But one of the biggest threats to governments is also the simplest: It is getting harder to collect taxes. Cybercommerce hovers teasingly above the jurisdiction of the nation state. And old-economy companies are increasingly migrating to offshore tax havens.

On Monday the Organisation for Economic Cooperation and Development, a club of 29 rich countries, published a report on this last problem. It identifies 35 countries and territories that specialise in sheltering corporations and rich individuals from tax; many are reckoned to be taking in much more money than they used to. This is a drain on the countries from which capital flowed, including some poor ones. The development agency Oxfam estimates that poor countries forfeit $50 billion a year in tax revenue, about the same as the West's aid budget.

The defenders of tax havens make two arguments. The first is that Vanuatu and Panama are entitled to write their own tax laws without bullying from rich countries. This is fair up to a point; but sovereignty cannot be an absolute defence of harmful behavior that spills across borders. The second is that tax havens usefully keep tax rates down in other countries. Again, some competition between tax jurisdictions may be healthy. But it is absurd to suggest that the United States or Italy should set its tax rates so as to compete against mini-states with few citizens or public services.

The OECD report makes clear what the consequences of that competition would be. Taxes on firms and rich people would fall; those on less mobile workers would increase. As well as increasing inequality, this would boost hiring costs and so cut job opportunities. The knowledge that rich people and firms are evading tax undermines others' faith in the system. It stokes anti-tax passions, and erodes trust in government.

Given these costs, the OECD governments are right to threaten sanctions on tax havens that refuse to reform themselves. But OECD countries also need to fix their own tax laws, which sometimes invite the use of tax havens. The United States allows its exporters to set up shell companies abroad in order to reduce their US tax burden and so boost their competitiveness. It also permits insurance companies to set up parent companies in Bermuda and so escape taxes completely. The World Trade Organisation has ruled against that first loophole; Republican Rep. Nancy Johnson and two Democratic colleagues are sponsoring a bill to close the second one. The sooner the US cleans up its own house, the greater its authority to demand that tax havens do likewise.