There was more than an air of cry-baby defensiveness a few weeks ago at the G20 Summit in London, when Jean-Claude Juncker, the prime minister of Luxembourg, accused the U.S. of harboring tax havens. Juncker’s country, along with countries such as Liechtenstein and Switzerland, was being pressured by the international community to crack down on bank secrecy, and Juncker pointed the finger right back at the U.S., claiming we needed to scrutinize our own tax havens—Delaware, Wyoming and Nevada.
Wait. Stop. What is a tax haven?
“Like lots of other things, like fairness and beauty, tax haven is something in the eye of the beholder,” says Steve Johnson, E.L. Wiegand Professor of Tax Law at UNLV. “There’s no universal singular definition …”
One definition is simply a state or country that has low tax rates compared to other states or countries. “By that definition the U.S. is one of the largest tax havens in the world,” says Jim Henry, Edward R. Murrow Fellow in Law and Economics at Tufts University in Boston. It’s easy, he says, for wealthy foreigners to put their money here. “We have no tax information exchange with the Mexican authorities, and there are a lot of wealthy foreigners who have their money in the U.S.”
- Tax haven:
- 1. A country or independent region where taxes are low
- 2. A foreign country or corporation used to avoid or reduce income taxes, esp. by investors from another country
- From Dictionary.com
In the more common notion of a tax haven—a place where the inner workings of banks are shielded from scrutiny, or where obscuring who owns what assets through shell companies is easy—Henry notes that, in theory, the U.S. is not really a haven. But in practice, those who are savvy enough can make it “impossible for anyone to find the assets.”
Nevada’s lax tax standards are certainly never more apparent than right now. (Exhibit A: We’re broke.) As Forbes magazine put it in 2007, “Nevada is the closest thing the U.S. has to a tax haven. No personal income tax, no capital gains tax, no gift tax, no inheritance tax, no franchise tax, no inventory tax.
“Nevada quite consciously and intentionally is trying to attract companies and wealthy individuals from other jurisdictions … target No. 1 being California,” Johnson says. It’s difficult to determine how many businesses that have set up shop in Nevada may have originated in California, but according to the secretary of state’s office, of the 27,000 so-called “foreign entities” qualified to do business in Nevada, 4,851 are California-based. (That’s second behind the more than 9,000 from Delaware.)
Certainly, California residents come here in part for the lower cost of living, which includes the lower tax burden. Johnson points to the case of Gilbert Hyatt, the California inventor who patented a microprocessor in 1990 and received some $40 million in licensing fees, according to Johnson. Problem? Hyatt claimed he moved to Nevada before he received his payments; California tax regulators claimed Hyatt left after he got paid, which would mean he owed that state millions in unpaid taxes. Hyatt filed a countersuit against the state, accusing its tax board of invading his privacy and committing other abuses; the second case dragged on for years until last August, when a jury awarded Hyatt $388 million. (The original tax suit is ongoing.)
While Hyatt’s case is extreme, it does exemplify what may become a more common trend these days, one where, says Henry, the government “is going for any pockets of revenue we can find,” says Henry. “The rhetoric of tax competition, and the glories of the free-market system, such as they are, are long in the tooth.”
Nevada will remain an attractive bet because of its low taxes. “But just because the taxes differ in two places, that’s no reason to call that a tax haven,” says Keith Schwer, director of the Center for Business and Economic Research at UNLV. “There can be some legitimate differences.” But Schwer notes the other side of that equation. “In the U.S., Nevada is a low tax effort state, but it’s also 50th in terms of drop-out rate.”