Matthew Lynn of Bloomberg has an excellent column about the Germany-Liechtenstein tax controversy. Lynn explains that the fiscal sovereignty of low-tax jurisdictions should not be hindered just because politicians in other nations are greedy for more revenue. He also explains that competition between nations should be applauded, not persecuted, and he makes the key point that criminals and terrorists prefer to use “onshore” banks (even the United Nations has admitted bad guys avoid so-called tax havens). Key excerpts include:

Over the past few weeks, [Angela Merkel] has been leading an all-out assault on her tiny neighbor Liechtenstein. Its crime? Not cooperating in Germany’s investigation of alleged tax evaders. The tussle between Germany and Liechtenstein is just the overture to a wider battle between the big European nations and the tiny low-tax principalities. Next up: Monaco and Andorra. And yet, the attacks are completely unfair. Places such as Monaco and Liechtenstein have a right to keep banking secrecy and shouldn’t be forced to act as tax enforcers for other countries. Germany should spend more time worrying about why so much wealth is fleeing its borders — and less time picking on places a mere fraction of their size. … You can see why the tax havens are an irritation for the big European governments. In a world of increasing mobility, and better communication links, it has become easier for the wealthy to shift their base to a more tax-friendly environment. Half the British corporate establishment seems to be based in Monaco these days. Plenty of Germans appear to be storing money away in
Liechtenstein. … Germany has a right to set whatever laws it likes for people living in Germany. If it wants to ban its citizens from holding accounts — or setting up trusts and foundations — in other countries, it can do so (and deal with the flight of people and capital). But it can’t harass other countries into changing their practices. If people invest in low-tax countries or in legal structures such as foundations, their tax liability is their business, not the responsibility of the host nation. For most legitimate investors, low-tax principalities provide a useful alternative to the high-tax, big-government consensus that suffocates much of Europe. Lastly, it is ludicrous to say that this kind of tax “competition” is unfair. All competition is unfair. These are small nations entitled to make their living any way they want to. It is no more unfair than Germany’s proficiency at making cars, or the French aptitude at making wine. Should the Germans shut down their luxury-car industry because it makes life difficult for auto workers in the rest of Europe? Of course not. So why should Liechtenstein close its financial-services industry? Naturally, tax havens should make sure they aren’t harboring assets for criminals or terrorists. And yet, that is a red herring. Mounir el-Matassadeq, the only person to stand trial over the Sept. 11 terror attacks in the U.S., operated out of Hamburg, not Liechtenstein. One of the suspected hijackers used accounts in Florida, not Monaco. In reality, terrorists use everyday banks because they attract less suspicion.