My reflex as a political economist, I look at democracy mainly as a device of solving public goods and distributional concerns. I read for class a small book by Gabriel Zucman. The Hidden Wealth of Nations tells the story of tax heaven. It gathers data, and suggests realistic measures, although one can feel that the author would eventually like to invade Luxembourg and Switzerland. It is very well written and I strongly recommend it.
The ability to tax is at the heart of democracy. Without it, there is little democracy purpose left. We would have no real state capacity, or no state for that matter, and thus not much to decide about. As such, my natural inclination reading Zucman’s evidence was to think that better tax capacity is necessary for democracy. If the rich can opt out from democracy, democratic decisions are constrained to those that do not to harm the rich. And in very unequal societies, it makes democracy pointless.
If you are familiar with the literature on democratization (Acemoglu&Robinson, Boix, partly Przeworski), this may ring some bells. In this research, one key problem to solve is how the poor can reach a compromise not to ‘abuse’ their power under democracy. If we operate under the tyranny of the majority, democracy will result in bad policy and social conflict. Historically, this is at the heart of the ‘class compromise’ idea of socialdemocracy. In Boix’s account, capital mobility plays a key role: if the rich can take their asset and leave, then the expropriation power is limited. As a result, a low tax-stay at home equilibrium is flexible, as well as a high tax-capital flight, depending on parameter values. Dictatorship occurs when the rich have their wealth in the form of assets that can easily be taxed -like land.
The provocative conclusion seemed hard to escape: perhaps tax havens are good for democracy. I like to think about this as an exit-voice-arms idea. Under the democratization literature, the dilemma is about exit vs arms. This idea is similar to that ‘make the world safe for (former) dictators‘ and the problem posed by universal transitional justice.
What is left unexplored and I find more interesting is the voice dimension. If the rich could not escape domestic taxation, then perhaps they would become more involved in domestic politics. They may lobby, for looser regulation of money and politics that will allow having a stronger voice.They may contribute more strongly to political campaigns. They may run for office. Perhaps this involvement would not go further from fighting against taxation. In that case, going after tax havens would do no harm, since this wealth is currently not taxed. However, getting the rich involved in domestic politics may have other negative consequences. They may be potential allies for other segments of society (the upper middle class), shifting the balance of influence. Or, if participation in politics has a fixed cost -setting up a lobby industry, building a political network- the participation in tax politics may extend to other areas.
All the above is highly speculative. My professor asked me ‘So, you think that if we attack tax haven, then democracy will suffer’. I was reluctant to push my argument to say yes. But if we believe, like many in the literature, that asset mobility affects democratization in a quantitatively relevant manner, one can not ignore that tax havens are just a form of asset mobility so it must have some effect. And the same is true for more generic dimensions of participation. What seems totally unlikely to me is that the rich will just watch and see while they are taxed.