Why is it so hard to crack down on offshore tax scofflaws?

With governments needing every penny, the reckoning is coming for those unpatriotic miscreants who just won't pay up. Once-secretive Swiss bank UBS is handing $780 million over to the U.S. government for helping U.S. clients avoid U.S. taxes; in his speech to Congress, British Prime Minister Gordon Brown asked us to envision "the whole world finally [coming] together to outlaw shadow banking systems and outlaw offshore tax havens."

But can it really happen? This week, as those few spring break-seeking parents with a few disposable dollars left look south (there's still a three-night, all-inclusive Bahamian getaway going for $379 per person), millions of dollars will flow into the region quietly through wires, suitcases, and less public means, as they do every week. It'll be just a small portion of the estimated $7 trillion to $8 trillion stashed by wealthy individuals and multinational corporations in tax havens. Treasury Secretary Timothy Geithner parroted earlier administrations last week when he pledged "a much more ambitious effort" to stop tax havens; President Obama's budget statement said that the government could reap $210 billion over nine years by "[implementing] international enforcement, reform, deferral, and other tax reform policies." But shouldn't this have been done before? Why is cracking down on tax havens so hard?

Think of tax havens today as variants on a modern tropical disease: There are many sources from which the tax sucking can emanate, modern banking technology makes their obfuscation easier than ever, their biochemical innards are always morphing to duck the latest regulatory hurdle, and systematic efforts to deal with the problem are actually fairly recent. Definitions vary, but tax havens are generally seen as countries that have low tax rates (or levy none at all), bank accounts and incorporation options that are both secret and available to outsiders without requiring the whole outfit to be moved to the haven, and local officials trained at the Mr. Magoo School of Financial Regulation. The Organization for Economic Co-Operation and Development lists 35 countries "Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters"—in other words, states that weren't doing any of those things until the OECD put the screws to them.

The incentives and dynamics for tax havens (or tax havens in waiting) are clear: Allow big companies to set up incorporated entities in your country, charge them a very low tax rate (or none at all), and invite them to run their revenues through those entities, lowering the taxes owed in their main country of operations. The host benefits by drawing a large asset base on which to charge those low taxes or uses flat corporate registration fees to help bolster their balance sheets. For tax havens, at least, supply-side works: Lower rates bring more revenues (the ideal rate in one study was found to be 5 percent to 8 percent) and can help create good local jobs. For ministers and heads of state, there's also the prestige of having large, important corporations with major operations (even if only on paper) in your country, although it helps to be a stable democracy so that the companies don't have to worry about money going unlawfully askew. Neighboring non-tax havens may enjoy a bit of economic glow from having tax havens in their midst.

Corporations win, too: A December 2008 Government Accountability Office study found that 83 of the 100 largest publicly traded U.S. corporations had subsidiaries in tax havens. And not just a couple: Of Citigroup's 1,240 subsidiaries, 427 were found to be in tax havens, with 90 in the Cayman Islands and 91 in Luxembourg. In other words, it's a pretty good deal for everyone involved, and an incentive to get in on the game, except for the country losing the tax dollars—$100 billion in forgone revenue a year in the United States, according to Sen. Carl Levin, D-Mich.