Efforts by major countries to bully offshore financial centres out of business are "hypocritical and misguided", according to a leading advocate of tax competition.

"Tax competition is a powerful force for good economic policy," United States-based economist Dan Mitchell told OffshoreAlert. "When politicians know that labour and capital can cross national borders, they are much less likely to impose punitive tax rates. Indeed, tax competition encourages better fiscal policy, and doubtlessly has played a key role in the world-wide shift to lower tax rates and pro-growth tax reforms." Mr. Mitchell is a leading proponent of tax reform and works to achieve his goals as a Senior Fellow of The Cato Institute, which is a non-profit, public policy research foundation based in Washington, D.C.

"Remarkably, top personal income tax rates have dropped by more than 25 percentage points since 1980 and corporate tax rates have dropped by more than 20 percentage points in the same period," Mr. Mitchell told OffshoreAlert. "No wonder the global economy today is so much stronger and more prosperous than it was in the 1970s. Yet most of these tax-rate reductions would not have occurred in the absence of tax competition.

"So-called offshore financial centres have contributed to this wave of economic liberalisation. By providing tax-efficient platforms for global commerce, they enable investors and entrepreneurs to allocate capital in ways that boost economic growth. And, because of cross-border competition, they encourage so-called onshore jurisdictions to implement — or maintain — reasonable tax and regulatory policies. Indeed, many of the world's major 'onshore' nations, such as the United States and United Kingdom, are also 'tax havens'.

"Efforts to stifle jurisdictional competition are both hypocritical and misguided. It is reprehensible behaviour for the OECD to persecute smaller and less-powerful nations and territories when many OECD nations also have 'offshore' regimes. More importantly, tax competition should be celebrated because it protects the interests of workers, investors, and consumers by making it difficult for politicians to over-tax, over-spend, and over-regulate.

"Anti-tax competition initiatives would hinder global growth by facilitating bad policy. But this is not the only reason why national sovereignty should be protected. Most of the world's population still lives in nations that engage in political, ethnic, religious, and other forms of discrimination and persecution. Other nations are unable to fulfill basic functions such as providing personal safety, the rule-of-law, and macroeconomic stability. Offshore financial centres provide a valuable service to people from these nations, enabling them to protect the safety and security of their families by keeping assets in jurisdictions that protect the rights of individuals."

However, plenty of people disagree with Mr. Mitchell's positive view of the role offshore financial centres play in the global economy and one of them is Richard Murphy, research director of the United Kingdom-based Tax Justice Network, which campaigns for transparency in international finance and opposes secrecy.

"The role of offshore financial centres (OFCs) is to create 'secrecy spaces'," Mr. Murphy informed OffshoreAlert. "These are unregulated or lightly regulated combinations of entities that can undertake transactions without being subject to any real process of scrutiny. This can happen because the secrecy jurisdictions (sometimes called 'tax havens') that host offshore financial centres have passed legislation that ensure that entities created within their domain are deemed to be 'elsewhere' for regulatory purposes.

"The commercial operators within OFCs exploit this to ensure that their clients' entities are either 'elsewhere' i.e. not regulated in the locality in which they are registered, or 'nowhere', i.e. knowingly unregulated to any serious degree anywhere.

"The secrecy spaces created by jurisdictions are exploited by OFCs as the conduit for illicit transactions. Illicit funds might be the proceeds of crime, payments associated with bribery and corruption, capital seeking flight from the territory in which it belongs and from which it has not secured legal departure, or they might be profits seeking to be located in a place other than that in which they really arose so that taxation liabilities might go unpaid in the place where they are rightfully due.

"These flows would all be impeded if the secrecy space did not exist. They require the opacity that offshore financial centres provide to take place with limited risk of detection.

"There is no reason why a legitimate transaction need take place in a 'secrecy space'. They do not need the opacity that these provide. The risks of double taxation can invariably be eliminated without the requirement for secrecy or the use of an offshore financial centre.

"In that case there is no reason for offshore financial centres because their entire function is to create a mechanism used for abuse of the world's financial architecture. The consequence of that abuse is fourfold.

"First, open competition is undermined: those who compete legitimately are at a disadvantage, as are the local and small companies who cannot exploit such spaces. This produces artificial competitive advantage for those who compete illegitimately, or have significant presence in their market.

"Second, tax revenues are undermined in the transparent economies, shifting the burden of tax from those who own mobile capital onto those who do not. Third, democracy is undermined because the relationship between the taxpayer and the government they fund is undermined when some, and especially the wealthy, deny their responsibility to the state in which they reside or from which they earn their profit. Finally, illegality is encouraged at enormous cost to the world at large, in terms of crime, corruption and capital flight: the latter being a process proven to have enormously retarded the development of any countries in the world. The conclusion is obvious: offshore financial centres do not have a role to play in the world economy."

Mr. Mitchell and Mr. Murphy will openly debate whether offshore financial centres are good or bad for the global economy at the 6th OffshoreAlert Financial Due Diligence Conference, which will take place in Fort Lauderdale, Florida, US, on April 13-15, 2008. For more information go to www.offshorealert.com

David Marchant is a former Royal Gazette business reporter, who is the principal of KYC News, an organisation that reports financial crime around the world.