Capital+flight

Capital Flight is a form of tax evasion and aggressive tax planning where illicit money flows out of one country into another via tax havens. There are many definitions of capital flight, and one of them is: “The accumulation of claims on nonresidents by residents that escape control of the domestic government.” According to Cumby and Levich (1987) the capital include “... all foreign assets (both reported and unreported, including financial assets, direct foreign investments, and real estate) acquired by the banking and non-bank private sectors as well as the public sector, or it could be only a subset of this complete list.”
 * Introduction **

Especially in Lesser Developed Countries (LDCs), capital flight is a problem and one of the reasons is that capital flight is considered to reduce national welfare when money that should be used for the construction of the country, instead goes elsewhere and is considered as lost money to the country.  **Defining Capital Flight **  There are many definitions of capital flight, however it isn’t easy to define and many different researchers have tried through the years, for example Ul Haque, Khan and Dooley. These three researchers define capital flight “… as those external assets held by the private sector that do not generate income recorded in the balance of payments accounts of the country.” The problem with defining capital flight is the question of what should be considered capital flight. Is for example “normal” capital outflow also capital flight or not? One also has to consider the fact that there is always a two-sided flow of capital between countries and it can be risky to consider one of the ways as capital flight.  The world we live in is a very international one. People can move quite easily from country to country and the same goes for their money: they can move it all around the world. One way to define capital flight could be to look at the illegal capital outflow, according to Cumby and Levich (1987) and then consider the legal capital outflow as “normal.” They add however, that this isn’t enough as for example the illegal capital outflow isn’t registered and therefore it’s hard to take into account.  **Reasons for capital flight **  Capital flight has its origins in the world being more and more international. Earlier when businesses and people were more strictly domesticated in one country, capital flight didn’t exist in the way it does today. Today one of the essential causes for capital flight is the fear of economic catastrophe, for example hyperinflation. Another cause can be the fear of increasing capital taxes or compulsory privatization.  **National social welfare and capital flight **  One of the risks that is considered to be a cause of capital flight, especially domestic capital flight, is the reduction of national social welfare. This is especially brought up in relation to LDCs. It is hard to estimate exactly how much money that goes out of LDCs but researchers think the amount is $858.6 billion – $1.06 trillion. One can, however, not be sure if capital really means a reduction of national social welfare. For example, if there is a capital flight of $10 billion, one cannot be sure that the money would have been spent on the national welfare had it not been taken out of the country, or if it had been spent on something else that wouldn’t have supported the welfare of the country after all.

In order to reduce capital flight public policies are important “… for the domestic government in the presence of international capital mobility and possible evasion of taxation or appropriation by the home government by domestic savers.”