What Problems and Opportunities are Created by Tax Havens?

Dhammika Dharmapala∗

Prepared for Oxford Review of Economic Policy issue on “Business Taxation in a Globalised
World” (Vol. 24 No. 4, Winter 2008)

Preliminary and incomplete: please do not cite without permission

Department of Economics, University of Connecticut, email: dhammika.dharmapala@uconn.edu.

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1) Introduction
Tax havens have attracted increasing attention and scrutiny in recent years from
policymakers, as exemplified by the OECD’s initiatives to combat “harmful” tax practices
(OECD, 1998, 2000, 2004). The interest in tax havens reflects their disproportionate role in the
world economy, and in particular their centrality to many of the important current policy debates
in taxation, including international tax competition (Slemrod, 2004; Hines, 2006, 2007) and tax
avoidance activity by corporations (e.g. Desai and Dharmapala, 2006, 2008). This paper provides
an overview of the theoretical and empirical insights from a growing scholarly literature that
analyzes the consequences and determinants of the existence of tax haven countries.
The paper begins with an analysis of the characteristics of countries that tend to be
classified as tax havens. It focuses in particular on recent evidence (Dharmapala and Hines,
2006) that tax havens tend to have stronger governance institutions (i.e. better political and legal
systems and lower levels of corruption) than comparable nonhaven countries. The popular image
of tax havens is somewhat at variance with this picture, and emphasizes their role in facilitating
tax evasion by individuals. Recent estimates that have been widely influential in policy debates
suggest large revenue losses from haven-related evasion activities (e.g. Guttentag and AviYonah, 2006). This paper argues, however, that careful scrutiny of these estimates suggests that
they imply vast amounts of “hidden” wealth, and (if true) would have wide-ranging implications
(many of dubious credibility) for many economic phenomena far beyond the arena of taxation. It
appears more likely that evasion by individuals plays only a secondary role in generating tax
haven activity. Consistent with this view, some tentative evidence is presented in the paper
suggesting that the OECD’s recent initiative (promoting international information-sharing among
tax authorities) has had little impact on financial sector employment and wages in a
representative tax haven (Jersey).
The most important policy questions surrounding tax havens thus appear to relate to their
role in enabling tax planning by multinational corporations. Multinational corporations can use
tax havens to reduce or defer tax liabilities to other countries, through the strategic setting of
transfer prices (especially for intellectual property) and the strategic use of debt among affiliates.
It is often argued that tax havens erode the tax base of high-tax countries by attracting these
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The evidence does show that tax havens host a disproportionate fraction of the world’s foreign direct investment (FDI). There are a variety of other elements common to tax havens. Section 6 concludes. the term is applied to countries and territories that offer favorable tax regimes for foreign investors. but has actually increased. Desai. and discusses recent estimates of revenue losses from tax haven activity. despite substantial FDI flows to tax havens.bank secrecy laws 3 . such as low or zero withholding tax rates on foreign investors. The generally robust growth of corporate tax revenues in major capital-exporting countries. Foley and Hines. 2007. recent theoretical and empirical research has tended to cast doubt on this view. while it is theoretically possible that the existence of tax havens could spur harmful tax competition and lower global welfare. corporate tax revenues in the US. Overall. The latter view appears to be supported by the recent experience with corporate tax revenues: despite substantial (and apparently increasing) FDI flows to tax havens. Another common feature . Section 5 discusses the theoretical literature on the effects of tax havens on the welfare of high-tax countries. according to an emerging “positive” view of havens (e. low or zero corporate tax rates. 2) What are Tax Havens. Section 2 describes the characteristics of tax havens. However. there is no standard definition of what this term means. first and foremost. Typically.g. while taxing immobile firms more heavily. Hong and Smart. and what are their Characteristics? Although tax havens have attracted widespread interest (and a considerable amount of opprobrium) in recent years. this need not necessarily imply that their existence makes high-tax countries worse off. If differentiating between mobile and immobile firms is difficult for informational or administrative reasons. and considers some relevant evidence. 2006. suggests that the concerns expressed about the deleterious effects of tax havens may be somewhat exaggerated. UK and other capital-exporting countries has not fallen. Section 4 assesses the consequences of the OECD initiative. 2006a. The elements of these favorable regimes include. the existence of tax havens can enhance efficiency and even mitigate tax competition. 2007). This traditional “negative” view of tax havens has recently been modeled formally by Slemrod and Wilson (2006). Hines. Section 3 outlines how havens can facilitate tax evasion by individuals and tax avoidance by corporations.types of corporate activities. b. It is possible that havens enable high-tax countries to impose lower effective tax rates on highly mobile firms.

tax havens’ geographical characteristics lead them to be more intrinsically inclined towards economic openness. Sachs and Mellinger (1999). as illustrated in Figure 1. as measured by the number of telephone lines per capita. While the classification of countries based on these criteria inevitably involves some degree of subjectivity. there are approximately 40 countries and territories that appear in most published lists of tax havens.have attracted great attention. havens are more likely to have British legal origins and less likely to have French legal origins than is the typical country. The coastal population measure is also constructed by Gallup. all of which also appear in Diamond and Diamond (2002) and various other sources. as classified by La Porta et al. Appendix 2. Tax havens are on average substantially more affluent than are nonhavens. p. They are also poorly endowed with natural resources: the value of their subsoil assets per capita (as estimated in World Bank (2006)) is much smaller than that for the typical nonhaven country. and have a larger fraction of their population located within 100 km of the coast. 4 .1 Havens also tend to have a relatively sophisticated communications infrastructure. Tokyo or Rotterdam. Havens are also more 1 Proximity to major capital exporters is measured by Gallup. DH provide quantitative measures of many other relevant characteristics. Sachs and Mellinger (1999) as the distance by air from the closest of New York. DH begin with the list of jurisdictions in Hines and Rice (1994. In addition to being smaller in population size and more likely to be island countries (as expected). and match these with countries and territories for which current data on economic and other characteristics are available. the basic definition of havens follows that in Dharmapala and Hines (2006. (1999)) and political institutions. As shown in Figure 2. 178). they tend to be located in closer proximity to major capital exporters. This set of countries is listed in Table 1 (under the heading: Tax havens (DH)). What distinguishes this group of countries from the rest of the world? Even a casual observer is likely to be aware that tax havens tend to be small and that many are islands. Tax havens also differ substantially from nonhavens in their legal origins (the historical source of a country’s system of commercial law. hereafter DH). In particular. In this paper. although they appear to be of declining significance (as discussed in Section 3 below) due to growing international efforts to promote information-sharing among the tax authorities of different countries.

likely to use English as an official language and to have parliamentary rather than Presidential political systems. tests using a variety of statistical approaches show that this relationship is highly robust. DH (2006) interpret these results within the framework of the standard result in the theory of optimal taxation that a small open economy should not levy any source-based tax on foreign investors (Gordon. the absence of official corruption. respect for the rule of law. however. for instance through natural resource endowments or agglomeration externalities in capital formation. Kraay and Mastruzzi. In the real world. this conclusion may not apply to countries that enjoy significant location-specific rents. 1986). DH (2006) find that tax havens score substantially better on this measure relative to comparable nonhaven countries. and suggest that a causal interpretation (i. so a more straightforward and efficient means to raise revenue would be to tax workers directly. Moreover. which is slightly higher for small havens than for small nonhavens (DH. This governance index measures several different dimensions of governance quality. as stated policies would count for little with foreign 2 An exception is UN membership. those small countries that are not tax havens would generally not reap any benefits from seeking to become havens. including political stability. rather than sovereign states (as reflected in a lower rate of membership in the United Nations (UN). this theoretical framework suggests that the real puzzle is not why some countries become tax havens. of 75 countries and territories with populations less than a million in the DH dataset. 2005). 2006).2 DH (2006) focus in particular on an overall measure of governance institutions created by the World Bank (Kauffmann. that countries with stronger governance tend to become tax havens) may be reasonable.e. DH (2006) argue that only countries with good governance are able to credibly set low tax rates. government effectiveness and democracy. The burden of such a tax would be shifted entirely to domestic workers in the form of lower wages as investors demand higher pretax rates of return. only 31 are tax havens). More generally. but rather why so many small countries do not (for instance. The index is normalized to have a mean of zero across all countries and a standard deviation of one. 5 . with higher values indicating stronger governance institutions. These differences mostly persist when attention is restricted only to haven and nonhaven countries with small populations (below one million). They are somewhat more likely to be dependent territories.

but also to “pandering” stamp issuance (though not to involvement in facilitating money laundering).4 3) Individual and Corporate Uses of Tax Havens In February 2008. arguing that better governance leads not only to greater policy credibility but also to a greater capacity to undertake welfare-enhancing government activities. The bank secrecy laws of tax havens create the opportunity to evade these taxes. dividends and capital gains earned by their residents abroad. becoming a tax haven appears to a successful economic development strategy for those countries that are able to make this choice: Hines (2005) finds that tax havens experienced higher rates of economic growth over the period 1982-1999 than did comparable nonhavens. available at http://www. If they fail to report this income to their home country. which emphasises the use of tax havens by individuals for the purpose of illegally evading home country taxes. 5 See e. Foreign individuals can locate assets in tax havens. “Steuerskandal erfasst Europa und die USA” Der Spiegel Online (26 February 2008).uk/2/hi/business/7261830.1518.stm.investors in the absence of a strong institutional framework.spiegel. He suggests a more general interpretation. thereby earning interest. 6 .00. This scandal exemplifies the image of tax havens in the popular mind. The mechanism underlying this type of evasion is straightforward. Slemrod (2008) finds that better governance is related not only to being a tax haven.html. 4 Slemrod (2008) views tax havens within a broader context of practices that involve the “commercialization” of state sovereignty. Virtually all countries with income tax systems impose residence-based taxes on the interest.de/wirtschaft/0. an international scandal relating to tax evasion unfolded after Germany’s tax authorities purchased data from a former employee of a Liechtenstein bank.5 This information on German individuals with Liechtenstein bank accounts led to the prosecution of prominent German citizens for tax evasion. dividends and capital gains. 2006). and to a focus on the role played by Liechtenstein and other tax havens in facilitating evasion. and the issuance of stamps designed to appeal to foreign collectors.g.3 Moreover.bbc. a concept that also encompasses involvement in facilitating money laundering activities.538014. The scandal also spread to the UK – see “UK in Liechtenstein Tax Data Deal” BBC Online (24 February 2008) at http://news.co. bank secrecy provides them with the assurance that the source country (the tax haven where the income is earned) will not provide information on this income to the home country. 3 Some limited but intriguing supporting evidence for this view is that inbound foreign direct investment (FDI) appears to be much more sensitive to corporate tax rates in countries with stronger governance institutions (DH.

this is not because these firms are seeking to evade home country corporate taxes. then there may be a case for subsidizing foreign investment. FPI is worthy of encouragement. 9 However. for instance. if investors evade home country taxes on their tax haven investment returns. Thus. For instance. it might be the case that they have many nontax advantages as vehicles for global diversification. investors have failed to achieve these gains from diversification. about a quarter of US firms’ foreign direct investment (FDI) is located in tax havens (as defined in DH (2006)).9 Evasion also 6 This is apparent. Dharmapala (2008) calculates that in 2004 US investors held only 12% of their equity portfolios in foreign stocks. as distinct from FDI. Historically. Economists have long argued that there are substantial gains available to investors from international portfolio diversification. which provides insurance against economic risks that are specific to the investor’s home country (French and Poterba. For instance.8 Given the sophisticated financial infrastructure of the more successful havens.6 Presumably. they will surely not risk prosecution on behalf of their shareholders.e. from 2004 to 2005. Rather. However. that investors tend to place too much of their portfolios in home country stocks) appears to be eroding over time.However. but also for other reasons that are not fully understood by researchers. and the corresponding number for UK firms’ FDI is similar. partly because of capital controls and a lack of information about foreign assets.7 As a general matter. the policy questions raised by corporate uses of havens may be very different from those relating to individual uses. 1991). 7 . However. corporations use tax havens for legal tax avoidance and tax planning activities. However dedicated corporate managers may be to the maximization of after-tax shareholder value. if the home bias is caused by an irrational aversion to foreign assets. increases in holdings of foreign stocks represented 43% of the total increase in holdings of equity. Evaluating individuals’ use of havens is complicated by the wider context of understanding foreign portfolio investment (FPI). the potential for evasion may create an incentive for investors to locate too much of their portfolios abroad. in Figures 7 and 9 – see the discussion in Section 5 below. lax enforcement of home country taxes on foreign-source income may be one way to implement such a subsidy. then there may be efficiency costs that must be weighed against the obvious benefits of FPI. This “home bias” phenomenon (i. 8 For the US. which is carried out by multinational firms. 7 FPI refers to cross-border investment by individuals (or by institutions such as pension funds on behalf of individuals). corporations also locate large amounts of investment in tax havens.

raises issues of fairness and “tax morale”. Poterba. who begin with an estimate (based on data from the Boston Consulting Group) of the value of assets held overseas by US individuals. which (assuming that all of the interest. However. 8 . when evaders’ hidden assets fall in value. It is standard (e. and does not take into account the potential simultaneity of countries’ choices to become OFCs and tax havens.10 Given the illegality of evasion. then a more reasonable return might be 2%. the evaders are effectively making a contribution to the home country treasury because they are unable to deduct their losses. p. it is worth considering their implications in some detail. if all of the hidden assets are invested in equities. It should be noted at the outset that a 10% return appears optimistic. the appropriate tax rate would then be the effective tax rate on equity returns (currently 15% on dividends and realized capital gains for a top-bracket taxpayer). As this and similar estimates have been widely influential in policy debates. Assuming that one third of equity returns 10 Rose and Spiegel (2007) argue that portfolio investment in offshore financial centres (OFCs) is substantially motivated by tax evasion. this conclusion rests essentially on a regression of OFC status on tax haven status (see Table 2. 11 For instance. especially for interest income. If all of the $50 billion loss were generated by hidden assets that were invested in bank deposits or other debt instruments. They assume that offshore assets earn a 10% annual rate of return (apparently risk-free). though with the caveat that it does not necessarily account adequately for risk. The importance of the costs associated with individuals’ use of tax havens depends crucially on how much tax evasion occurs through havens. as home country revenue is eroded and confidence in the tax system is undermined. would have been taxed at the top marginal rate of 35%) implies $7. some estimates have recently been proposed.5 trillion of hidden assets.11 However. suggesting that significant amounts of revenue are lost by countries such as the US as a result of tax evasion through havens. On the other hand. However. A representative example is provided by Guttentag and Avi-Yonah (2006).g. 1319). and compute a revenue loss to the US of $50 billion a year. 2004) to use an effective capital gains tax rate of about a quarter of the statutory rate to account for the deferral advantage enjoyed by taxpayers because capital gains taxes are imposed only upon the sale of an asset. then it may be reasonable to use their assumption of a 10% return. if reported. this is obviously inherently difficult to quantify.

5 trillion. This has widespread ramifications for a variety of economic issues extending far beyond the arena of taxation. The $67. Other US institutions and entities can also be compelled to provide information to the US government. $3. Moreover. For instance.worldbank. The home bias would be much less pronounced than currently 12 These data are available at www. 13 This is obtained from the World Bank’s World Development Indicators (WDI). securities brokers and dealers. the aggregate stock market capitalization of publicly-traded US firms in 2005 was $17 trillion.3 trillion is in the form of equity and the rest in the form of debt). 9 . thus. To put this additional wealth in context.13 The implications of the foregoing argument are quite far-reaching.5 trillion of hidden assets must therefore be held in tax havens through non-US entities. other financial institutions. not only in tax havens. most of the assets reported in the TIC data are located in countries with information-sharing arrangements and tax treaties with the US. available at http://econ. and therefore constitute an additional stock of assets (beyond the visible assets reported through TIC). The $50 billion revenue loss estimate thus implies hidden overseas assets of $6-7. and conversely that US FPI is more than two and a half times as large as one might suspect on the basis of official figures. It is rather unlikely that investors would seek to evade taxes on investments reported under the TIC system. the most authoritative and comprehensive source of information on the portfolio holdings of foreign securities by US investors. Many of the banks and other financial institutions that are surveyed routinely report their investors’ taxable income to the US tax authorities.are paid out as dividends (probably a conservative assumption) implies an effective tax rate on equity returns of under 8%.treas.6 trillion of US portfolio investments held overseas in 2005 (in all countries.gov/tic/ and are described in more detail in Desai and Dharmapala (2007). the US Treasury reports $4. These data are from the Treasury International Capital (TIC) system.12 TIC data are based on responses to periodic surveys from a defined panel of banks. it would suggest that US households are in aggregate considerably wealthier than currently believed. depending on the composition of those assets. It implies that nearly two thirds of all US FPI is hidden from the authorities. the implied value of assets hidden in tax havens by US taxpayers would amount to about $6 trillion.org. By way of comparison.

based on data from the US Bureau of Economic Analysis. but far less than might be expected on the basis of probabilities of audit and expected sanctions (e. among the self-employed). it may be worth exercising some degree of caution about these large estimates of revenue losses from evasion. such inferences do not seem warranted.14 It should also be remembered that in countries such as the UK and Germany that impose a value-added tax (VAT) in addition to an income tax. Andreoni. it appears unlikely that income tax evasion through havens is as big a problem as has sometimes been claimed. there are differences in timing and in rates. It should also be remembered that in countries such as the UK and Germany that impose a value-added tax (VAT) in addition to an income tax. income tax evasion should result in higher current or future VAT revenues. 10 . Depending on how this stock of hidden wealth has changed over time. income tax evasion should result in higher VAT revenues – of course. to some degree. 1998). then the primary policy questions relating to tax havens concern their use by multinational corporations (MNCs). If individual evasion is not as widespread as has been thought. given the very limited data on evasion.thought. but to some degree. large estimates of tax revenue losses due to haven-related evasion are not beyond the realm of possibility. It would not be entirely surprising if this tendency extends to the international setting.5 trillion in 2005.bea. a limited prevalence of evasion would be consistent with the tax compliance experience in the domestic setting. as currently believed. To be sure. Understanding how 14 Even if the $50 billion revenue loss estimate is thought to be credible.g. available at http://www. what governments lose on the swings they gain on the roundabouts. there tends to be a significant amount of evasion. In circumstances where taxpayers have some discretion over the reporting of domestic-source income (e.gov). the savings rate of US households may not be approximately zero (or even negative). In other words. believing them would require us to also revise our beliefs about a wide range of other economic phenomena. Thus. Erard and Feinstein. There are of course differences between the taxes in terms of timing and rate structure. taxpayers seem to comply to a greater degree than is consistent with the principles of Homo Economicus. However. It may seem that a naively optimistic view of human nature is required to believe that evasion is not widespread when the theoretical opportunity for it clearly exists. what governments lose on the swings they gain on the roundabouts. but.g. MNCs can use havens to reduce or defer their tax liabilities to other governments. it should be viewed in the context of the total revenues collected by the US Federal government (over $2. Before we revise our (generally well-attested) beliefs about this wide range of economic phenomena. However.

however. a foreign tax credit (FTC) is allowed for taxes paid to foreign governments. “passive” income from firms’ cash holdings or portfolio investments is taxed by the home country. A “worldwide” system (used for instance by the US. Governments generally insist that firms use “arm’s-length” prices (those 15 Note. In practice. the reallocation of income to a tax haven affiliate can magnify this deferral advantage (because the immediate source-based tax paid to the tax haven government is low or zero). Generally. such as Germany and the Netherlands) exempts foreign-source income from home country taxation.16 For MNCs resident in territorial countries. 16 The exemption pertains to “active” income generated by the firm’s normal business operations. a “territorial” system (used by most other capital exporting countries. they must choose prices for these transactions. MNCs based in countries with either territorial or worldwide tax systems have incentives to use tax havens to reduce or defer their tax liabilities. to avoid the “double taxation” that would result from the overlapping claims of the source and residence countries. there is an obvious advantage to being able to reallocate income from the home country (or some other high-tax country) to a tax haven. 1994). the UK and Japan) taxes this foreign income. 11 . Delaying the payment of these dividends by retaining earnings abroad can thus confer a substantial deferral advantage on the MNC by significantly reducing the present value of its US tax liability (Hines. the US permits the deferral of US taxation of foreign income until that income is “repatriated” to the US. Repatriation consists of the payment of a dividend by the foreign subsidiary to the US MNC. There are two alternative approaches to taxing the foreign-source income generated by a country’s resident corporations. however. Moreover.they can do this requires a brief digression on how governments tax the foreign income of their resident corporations. However. Most (nonhaven) governments insist on taxing economic activity that takes place within their borders. This incentive would not exist under a pure worldwide system. whether undertaken by domestic or foreign firms. When affiliates of the same MNC trade goods or services among themselves. worldwide systems are not pure – for instance. Thus.15 On the other hand. The prices used inevitably affect the allocation of the MNCs’ income across different jurisdictions. The major mechanisms for achieving this aim involve transfer pricing and the use of debt among affiliates. that the FTC is limited to the home country tax liability on the foreign income.

Thus. locate debt in high-tax jurisdictions. there are strong incentives for MNCs to use tax havens for international tax planning. However. choose where to locate research and development activity in order to ensure that royalty payments from other affiliates flow towards lower-tax jurisdictions. The overall result is that (as noted above) a vastly disproportionate amount of the world’s FDI is located in tax havens. A particularly important example in practice is intellectual property: affiliates of the same MNC can. 2004. 1998). Governments seek to restrict this practice through “thin capitalization” rules (imposing some restrictions on capital structure). Section 5 below addresses the question of how it might best be evaluated from a normative standpoint. but apparently with less than complete success. Hines. to a significant degree. 4) The OECD Initiative and its Consequences for Tax Havens Concern about the use of tax havens to erode the tax bases of higher-tax countries has prompted a major effort by the Organisation for Economic Cooperation and Development (OECD) to combat tax havens (OECD. 17 Consistent with the importance of this strategy. while holding fixed the aggregate capital structure of the MNC’s family of affiliates). This practice (known as “interest stripping” or “earnings stripping”) directs interest payments to low-tax countries. arm’s-length markets are thin or nonexistent.that would be used by unrelated parties engaging in market transactions). Sullivan. The OECD in 1998 introduced what was originally known as its Harmful Tax Competition initiative (OECD. Foley and Hines (2006a) find that US MNCs with extensive trade among affiliates and greater focus on research and development are more likely to establish affiliates in tax havens. Hines and Rice (1994) and a substantial subsequent literature find a large elasticity of US FDI holdings and of US affiliates’ profits with respect to foreign countries’ corporate tax rates. Foley and Hines (2004) find evidence consistent with MNCs locating debt in higher-tax countries (despite the thin capitalization rules noted above).17 MNCs can also choose to have affiliates in tax havens lend to affiliates in high-tax countries (i.g. 1998. 2006). This situation has not gone unnoticed in policy debates (e. Desai. for certain transactions.e. Desai. 2004). For instance. 2000. while generating interest deductions in high-tax countries. 12 . Empirical research (as surveyed for instance in Devereux (2007)) shows that MNCs are highly responsive to these tax incentives.

More generally. As part of the initiative. an alternative approach is to consider other variables that are less likely to be subject to misreporting. To circumvent these difficulties. most of these havens have agreed to improve the transparency of their tax systems and to facilitate information exchange.which was subsequently renamed the Harmful Tax Practices initiative. fn. the practical impact of these agreements remains uncertain. The complete set of 41 OECD-designated havens is listed in Table 1 (under the heading “Tax haven (OECD)”). the extent of informationsharing in practice is unclear. Moreover. in the sense of persuading most havens to agree to information-sharing arrangements. In addition. p.18 Thus. the OECD (2000. evidence on the impact of the OECD initiative is severely limited. More generally. However. any analysis based on reported investment data is vulnerable to the criticism that evasion occurs primarily through asset holdings that are unreported not just to tax authorities but also to statistical agencies. Kudrle (2008) examines total foreign portfolio investment (as reported by the Bank for International Settlements) in the Cayman Islands and in a broader set of tax haven countries. For instance. 17) produced a list of 35 countries and territories that it deemed to be tax havens. The initiative was intended to discourage the use of preferential tax regimes for foreign investors and to encourage effective information exchange among the tax authorities of different countries. 72. p. Kudrle (2008) does not use a control group of countries to account for possible shocks that affected FPI in haven and nonhaven countries alike. Examples include the levels of employment and 18 OECD (2004) lists five recalcitrant tax havens that had failed to make such commitments as of 2004 – see Table 1. 13 . However. 397)) that otherwise satisfied the OECD’s tax haven criteria were not included on the list because they provided “advance commitments” to eliminate allegedly harmful tax practices. His time-series analysis finds no significant impact of the OECD initiative. he concludes that it was ineffective because the information-sharing provisions were too weak. In the years since. the OECD initiative appears to have been successful. the commitments of many tax haven countries to exchange information and improve the transparency of their tax systems are often contingent on similar practices by OECD member countries. The preferential regimes identified by the OECD have also generally been abolished or modified to remove the features that the OECD found objectionable. another six countries (listed in Hishikawa (2002.

Instead. however.org/. One may conclude (as Kudrle (2008) does) that this implies that evasion via tax havens was a significant problem before the initiative. A negative effect of the OECD initiative on investment in tax havens may manifest itself not in a quantity effect (on employment levels) but a price effect (on the wages of workers in the financial sector). but this pattern is also shared by the UK.ilo. The basic conclusions. however. 17) and the information-sharing agreements began to take shape). 19 These data are available at http://laborsta. rather than individual evasion. we report the data for the Bailiwick of Jersey. There is a slowdown in employment in Jersey around the time of the initial announcement of the OECD initiative in 1998. The International Labour Organisation (ILO) reports data on employment and wage levels by industry for a large sample of countries. but this is mirrored in the UK. Figure 3 reports employment levels in the financial sectors of the two countries for the period 1997-2005. This could perhaps be because most tax haven activity involves corporate tax planning (which was not targeted by the OECD measures).wages in the financial sectors of tax haven countries. As we have seen. are similar when examining the average wage (measured in pounds per week) in Jersey’s financial sector. p. Similarly. and that the OECD’s measures were insufficient to address it. and that hence the OECD measures had little effect. there is a decline around 2001-2002 (after Jersey was named as a haven in OECD (2000. An alternative conclusion from this evidence is that evasion via havens was not a very important problem before the OECD initiative. without any pretence of econometric rigour. There is a general upward trend that does not appear to be interrupted by the OECD initiative. if anything. Thus. the coverage of smaller countries (including most tax havens) is very limited. and to various related implications of dubious credibility.19 Unfortunately. using employment and wages in the financial sector of the UK as a control. The most notable feature is that the two series follow a very similar trend. this evidence (limited though it undoubtedly is) does not suggest any impact of the OECD initiative on tax haven activity. wages in Jersey seem to increase faster over this period than in the UK financial sector. rendering a cross-country longitudinal study of the impact of the OECD initiative difficult. this view commits us to believing in the existence of vast amounts of hidden wealth. 14 .

However. forcing nonhaven countries to set lower tax rates than they otherwise would. nonhaven capital exporters could eliminate the use of havens by their corporations by 20 This prediction is of course consistent with the evidence on population size shown in Figure 1. In addition to the resource costs incurred by havens in providing concealment services. tax avoidance also induces nonhavens to expend additional resources on enforcement. In the equilibrium of this model. It is certainly a logical possibility that these conditions hold in the real world. Thus. thereby avoiding (or evading) home country taxes. their equilibrium entails that the (small and relatively powerless) havens impose significant welfare costs on the populations of larger and more powerful countries. many prominent tax havens (such as Bermuda and the Cayman Islands) are British dependent territories. the various forms of corporate tax planning outlined in Section 3 may nonetheless constitute a significant policy problem for high-tax countries.20 The existence of havens intensifies tax competition. and thereby reducing the supply of public goods. this perspective requires a belief in a political (and indeed military) equilibrium in which major powers tolerate substantial harm inflicted on them by small “parasite” countries and territories.5) The Consequences of Tax Havens for High-Tax Countries The foregoing arguments suggest that individual evasion is not as important a problem as has been claimed. they enjoy a substantial degree of fiscal autonomy. Even without exerting any pressure on havens. This point of view has been given a rigorous formal exposition by Slemrod and Wilson (2006). These welfare losses can be ameliorated in their model by the elimination of tax havens. However. However. Even tax havens that are independent sovereign entities (such as the Bahamas) are acutely vulnerable to economic. but it is difficult to believe that in practice they do not face any constraints in pursuing policies that are harmful to the UK. 15 . In their framework. political (and indeed military) pressure from major powers. Slemrod and Wilson (2006) present a rigorous statement of a set of conditions under which the existence of tax havens spurs harmful tax competition and lowers global welfare. firms based in nonhaven countries can choose to purchase “concealment services” from havens. They develop a model of tax competition in which tax havens are viewed as being “parasitic” on the tax bases of nonhavens. small countries endogenously choose to become tax havens.

2007) have specified conditions under which such benefits may be generated. when preferential regimes are permitted. On the other hand. 2006a. In a simple model of tax competition. Despite this. the optimal corporate tax rate will 21 The OECD initiative initially included provisions directed at corporate activities. If preferential regimes (i. Keen’s (2001) model is not explicitly motivated by the question of tax havens. countries can set high tax rates on immobile capital. while competing only over tax rates imposed on mobile capital. and on related issues of information-sharing. lower tax rates for more mobile forms of capital) are not allowed. 2007)). It should be remembered. Desai. This intuition extends quite readily to the analysis of the role of tax havens. that the OECD initiative focused on the use by individuals of havens for tax evasion. The rest of this section summarizes this “positive” view of havens. 7). but this element was soon dropped – see Kudrle (2008. but rather by preferential tax regimes for foreign investors or specific sectors (which were also targeted by the OECD initiative). On the whole. 2001. and considers some relevant evidence (see also Hines (2006. b. This claim may appear to be at odds with the OECD initiative described in Section 4. It was not aimed at corporate uses of havens. This will result in a needlessly low rate on immobile capital. Preferential regimes can thus mitigate tax competition by restricting its effects to a subset of the tax base.21 How might corporate tax haven activities beneficial for the MNCs’ home countries? A number of models (Keen.the simple expedient of changing the source rules for corporate income. As in Gordon (1986). or imposing immediate worldwide taxation. Hong and Smart. it appears more reasonable to believe that the world’s major economies benefit from the existence of tax havens. Hong and Smart (2007) develop a general equilibrium model of a small open economy in which the corporate tax serves to both tax the returns to inbound FDI and to tax the rents earned by domestic entrepreneurs. as discussed below.e. Foley and Hines. the burden of the former is entirely shifted to domestic workers in the form of lower wages. then countries are constrained to compete by setting a single tax rate for all forms of capital. where many of the largest economies engaged in multilateral action to curb the activities of tax havens. Keen introduces the assumption that capital may be heterogeneous in its mobility across borders. 16 . however. p.

It also increases the optimal corporate tax rate.22 In this setting. They derive positive optimal corporate tax rates through a different route. Foley and Hines (2006b) develop a model in which there are complementarities between investment in havens and investment in neighboring nonhaven countries. Foley and Hines (2006a) analyze the determinants of US MNCs’ choice of whether to establish affiliates in tax havens. They exploit exogenous variation in the scale of operations in foreign nonhavens by using foreign countries’ economic growth rates as an instrument. They find that the scale of a MNC’s foreign operations is a crucial factor in driving the establishment of affiliates in havens. enabling more redistribution from domestic entrepreneurs to domestic workers (without driving away FDI). Desai. the existence of havens can stimulate investment in nonhavens. Assume that there are two symmetric countries (A and B). Tax planning by MNCs (e. There are two corporate tax policies available to each government – a rate of 50% and a rate of zero (neither of 22 Slemrod and Wilson (2006) also model small open economies. 17 . the existence of tax havens can increase the welfare of nonhaven countries. Thus. sourcing income in the tax haven through interest stripping) lowers their effective tax rate and makes them more willing to invest in the nonhaven for any given statutory tax rate. The insights from this literature that are most relevant for analyzing the role of tax havens can be illustrated using a simple example.g.generally be positive when the government wishes to redistribute from domestic entrepreneurs to domestic workers. Thus. taxes on wages can be evaded. investment in nonhaven countries spurs demand for tax haven operations in order to reduce tax liabilities on the income from the former. This directly makes domestic workers better off. at some resource cost. The key to their result that the existence of tax havens raises welfare is that the government cannot discriminate between (immobile) domestic entrepreneurs and foreign investors in setting the corporate tax rate. On the one hand. the presence of a tax haven enables tax planning that lowers the cost of investing in neighboring nonhavens. Desai. Specifically. On the other hand. To explain their findings. A is home to an immobile firm A1 and a mobile firm A2 (each of which generates net income of 50 through domestic operations). governments prefer (up to a point) to tax workers indirectly by imposing taxes on capital rather than to tax them directly and thus incur these costs of evasion. and B is home to an immobile firm B1 and a mobile firm B2 (each of which generates net income of 50 through domestic operations).

The marginal cost of public funds in each country is 1. Equivalently. In these circumstances. Mobile firms choose the location of their operations in order to maximize after-tax profits. and hence for the wages of domestic workers (which are obviously higher when more capital is employed domestically). A1 (the immobile firm) is assumed to be unable to use the tax haven. The dominant strategy equilibrium is for each country to set a zero rate. even if they are mobile. Thus. if A imposes a 50% tax.which can discriminate between the two firms). It is assumed that immobile firms are nonstrategic. It imposes no taxes on firms’ profits and facilitates their tax planning activities. then A2 will (costlessly) move its real operations to B. plus the social benefits (0. Now. The existence of havens thus enables nonhavens to sustain higher equilibrium tax rates. tax competition is mitigated by the presence of the tax haven. but exempts foreign-source income). It is assumed that this is tax imposed on a territorial basis (i. imagine that a third country exists and functions as a tax haven. then A2 has available the option of keeping its real operations in A. firms do not choose to move from their original locations. If both countries set the same tax rate. it applies to all domestic income.2) and the after-tax profits generated within its borders (whether by domestic or foreign firms). If B sets a zero rate while A sets a 50% rate. Each country maximizes a payoff that is the sum of revenue collected (multiplied by 1. but sourcing all of its profits in the tax haven (thus ensuring a zero effective rate). reflecting the notion that alternative sources of revenue impose deadweight costs. The profits generated can be viewed as a proxy for the amount of capital employed within the domestic economy. The payoffs in the case where tax havens do not exist are shown in Figure 5. this will be of little value to them unless there are some immobile firms that can be taxed. in much the same way that it cannot move its operations to B. The new payoffs when a tax haven exists are shown in Figure 6.e. This raises B’s payoff by the extra 50 of profits that A2 generates in B.2 per dollar) of the revenue transferred from firms to the government. a country’s payoff ca be defined as the (pretax) profits generated within its borders (whether by domestic or foreign firms).2. Of course. even though this is Paretoinferior to the outcome where both set their rates at 50%. which results in welfare gains for both A and B. The Nash equilibrium is now for each country to set its rate at 50%. This underscores the 18 .

Hines. The standard “negative” view of tax havens.23 The relevance of these alternative models of tax havens thus depends on factors such as whether there are significant differences in the international mobility of different firms. if purely domestic firms were also considered. In contrast. tax havens are defined as in DH (2006). so that revenues have not fallen. 24 The data on FDI and on US corporate tax revenues are from the US Bureau of Economic Analysis. 1999. there is a slight upward trend over this period. and presumably reflects the various opportunities for tax planning provided by havens (discussed in Section 3 above). This is obviously vastly disproportionate relative to tax havens’ share of world population. In particular. while Figure 8 uses the OECD definition (see Table 1). as formalized by Slemrod and Wilson (2006) implies that increased tax haven activity would intensify international tax competition. it also enables more taxation of immobile domestic firms (Desai. precipitous or otherwise. and are available at http://www.gov. In Figure 7. Figure 7 shows the pattern of FDI in tax havens over the period 1994-2006.24 A large fraction of US FDI – about a quarter – is located in tax havens. Foley and Hines (2006a) find that in their sample of US MNCs. Moreover. However. a significant fraction (about 40% in 1999) do not have affiliates in tax havens. even among MNCs. and whether governments can discriminate between firms on this basis in setting tax rates. of course. but it is also possible to examine the testable implications of each view. The data on corporate tax revenues does not suggest any decline. the fraction of US Federal 23 Desai. These are difficult issues to determine. 2007). This evidence suggests considerable heterogeneity in the mobility of firms.importance to the “positive” view of havens of the assumption of heterogeneity across firms in their degree of mobility. and so be associated with declining corporate tax revenues in major capital-exporting countries. despite the obvious potential benefits discussed in Section 3 above. Nonetheless. this has been accompanied by base broadening. 19 .bea. This heterogeneity would be even greater. It is true that statutory corporate tax rates have tended to fall in recent decades. the “positive” view of havens suggests no necessary decline in revenues: even though increased tax haven activity may reduce tax rates on firms that use havens. In the US. the rapid growth in international capital flows in recent years (a disproportionate amount of which is located in tax havens) would be expected to have led to precipitous declines in revenues from the corporate tax.

A counterfactual involving significantly higher growth in corporate tax revenues than has actually occurred would represent a dramatic departure from past experience.25 The phenomenon also appears more broadly across Europe (as discussed in de Mooij and Nicodeme (2007)). incidentally. in the US. The data on UK corporate tax revenues are from the European Commission’s “Taxes in Europe” database. appears unlikely. however. (which. despite substantial FDI flows to tax havens. Figure 9 shows a very similar pattern for the UK (although data limitations restrict the period covered). suggests that the concerns expressed about the deleterious effects of tax havens may be somewhat exaggerated. the fraction of US FDI located in havens is considerably lower under this definition (around 10%). available at http://ec. The increased revenues are not due to increases in the US statutory corporate tax rate (which has remained unchanged over this period). Switzerland. It is of course possible to imagine a counterfactual world in which corporate tax revenues would have grown even faster in the absence of tax havens. Figure 8 also reports US corporate tax revenue as a fraction of GDP (rather than total revenues). As this list omits some important destinations for investment (such as Luxembourg.uk/. available at http://www. the very fact that they have increased. In Figure 8. starkly contradicts the notion that tax haven activity by MNCs has eroded the US corporate tax base. 2006). 20 .tax revenues derived from corporate taxes has increased over this period.europa. Nonetheless. Hong Kong and Singapore). There are various explanations for why US corporate tax revenues have increased (see Auerbach (2006)). This.statistics.gov. however. For instance. especially since a decline associated with the 2001-2002 economic downturn. the recent increases shown in Figure 7 represent the reversal of a longer-term decline going back to the early 1960’s (Auerbach. the generally robust growth of corporate tax revenues in major capital-exporting countries. the basic pattern is very similar to that in Figure 7. the definition of havens is restricted to those designated as such by the OECD (see Table 1).eu/taxation_customs/taxation/. Moreover. 6) Conclusion [to be written] 25 The data on UK FDI is from the UK Office for National Statistics. Thus. Tax havens are defined as in DH (2006). the robustness of corporate tax revenues in the face of global economic integration is by no means confined to the US. cannot easily be attributed to tax havens). This increase does not appear to be sensitive to the precise definition of tax havens.

(2006a) “The Demand for Tax Haven Operations” Journal of Public Economics. K. and Foreign Diversification Opportunities” NBER Working Paper #13132. Jr. M. 2451-2487. 513-531. 145-179. 219-224. Erard and J. Institutions. French. A. and D. Firms and Profit: A Survey of Empirical Evidence” Oxford University Centre for Business Taxation Working Paper 0702. 176-187. 59. Dharmapala (2008) “Corporate Tax Avoidance and Firm Value” Review of Economics and Statistics. (2004) “A Multinational Perspective on Capital Structure Choice and Internal Capital Markets” Journal of Finance. Auerbach. M. Hines Jr. Dharmapala. R. 91. Nicodeme (2007) “Corporate Tax Policy.. C. forthcoming. Devereux. Desai. 818-860. Entrepreneurship and Incorporation in the EU” Tinbergen Institute Discussion Paper 2007-030/3. C. B. (2006) “Why Have Corporate Tax Revenues Declined? Another Look” CESIfo Working Paper 1785.References Andreoni. M. 90. A. P. (1999) “Are We Racing to the Bottom? Evidence on the Dynamics of International Tax Competition” Proceedings of the National Tax Association Annual Conference. Dharmapala (2006) “Corporate Tax Avoidance and High Powered Incentives” Journal of Financial Economics. and D. A. F. 90. 222-226. R. Desai. A. Hines. C. Desai.. M. 81. (2008) “The Impact of Taxes on Dividends and Corporate Financial Policy” Working paper. A. M. Desai. A. Foley and J. Dharmapala (2007) “Taxes. J. F. (2006b) “Do Tax Havens Divert Economic Activity?” Economics Letters. Feinstein (1998) “Tax Compliance” Journal of Economic Literature. de Mooij. (2006) “Which Countries Become Tax Havens?” NBER Working Paper #12802. 21 . M. D. Desai. Desai. Hines Jr. A. Poterba (1991) “Investor Diversification and International Equity Markets” American Economic Review Papers and Proceedings. and D... R. Foley and J. and J. M. J. R. and J. R. A. R. Desai. (2007) “The Impact of Taxation on the Location of Capital. Foley and J. M. Dharmapala. 79. Jr. 36. and G. Hines. F. M. D.

) Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administration.) Tax Policy and the Economy. 222-279. R. 15. and M. Jr.. 65-99. Slemrod. 55. 1086-1102. Auerbach. Hines. Hines. Shleifer and R. Jr. D. Vishny (1999) “The Quality of Government” Journal of Law. Lopez-de-Silanes. Sachs and A.. (2005) “Do Tax Havens Flourish?” in J. eds.. J.. H. J. A. pp. Jr. R. 389-417. J. La Porta. and E. UK: Cambridge University Press. (2006) “Will Social Welfare Expenditures Survive Tax Competition?” Oxford Review of Economic Policy. Hines. D. Economics. Gordon. Hines. Kudrle. 22. (2007) “Corporate Taxation and International Competition” in A. R. 22 . Vol. & Organization. 1. Jr. (1986) “Taxation of Investment and Savings in a World Economy” American Economic Review. Washington. 323-347. 1942. MA: MIT Press. R. M. Mellinger (1999) “Geography and Economic Development” Harvard Center for International Development Working Paper No. Hong. A. Q. Taxing Corporate Income in the 21st Century. Hines. 76. 109.. Hines. 1-23. Rice (1994) “Fiscal Paradise: Foreign Tax Havens and American Business” Quarterly Journal of Economics. J. Jr. R. and J. (2002) “The Death of Tax Havens” Boston College International and Comparative Law Review. J.. DC: Economic Policy Institute. (1994) “Credit and Deferral as International Investment Incentives” Journal of Public Economics. OECD (2000) Towards Global Tax Cooperation: Progress in Identifying and Eliminating Harmful Tax Practices. M. Sawicky (ed. Cambridge. Mastruzzi (2005) “Governance Matters IV: Governance Indicators for 1996-2004” World Bank working paper. R. F. (2008) “The OECD’s Harmful Tax Competition Initiative and the Tax Havens: From Bombshell to Damp Squib” Global Economy Journal. T.. Article 1.. J. J. R. D.Gallup. Paris: OECD. R. J. Hishikawa. Kaufmann. 8. 330-348. and R. 149-182.. Poterba (ed. 25. Smart (2007) “In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment” CESIfo Working Paper No. Guttentag. OECD (1998) Harmful Tax Competition: An Emerging Global Issue Paris: OECD. J. Jr. R. J. A. Avi-Yonah (2006) “Closing the International Tax Gap” in M. Cambridge. Kraay and M. 19.

88. Slemrod. 1169-1186. Wilson (2006) “Tax Competition with Parasitic Tax Havens” NBER Working Paper 12225. Poterba. World Bank (2006) Where is the Wealth of Nations? Measuring Capital for the 21st Century. Washington. D. 94. M. (2004) “Taxation and Corporate Payout Policy” American Economic Review Papers and Proceedings. J. M. DC. Slemrod. (2008) “Why is Elvis on Burkina Faso Postage Stamps? Cross-Country Evidence on the Commercialization of State Sovereignty” Working paper. September 27. and M. Rose.OECD (2004) The OECD’s Project on Harmful Tax Practices: The 2004 Progress Report. World Bank. (2004) “Shifting of Profits Offshore Costs U. Spiegel (2007) “Offshore Financial Centres: Parasites or Symbionts?” Economic Journal. J. J. A. 117. (2004) “Are Corporate Tax Rates. Sullivan. 171-175. or Countries. Converging?” Journal of Public Economics. Treasury $10 Billion or More” Tax Notes. K. A. 23 . Slemrod. Paris: OECD.S. J. 1310-1335. and J.

“Tax haven (OECD)” refers to the definition of tax havens in OECD (2000. but includes an additional six countries (listed in Hishikawa (2002. 1 = tax haven and 0 = nonhaven. 17). fn. Appendix 2. 24 . 178). In each case. * Tax haven designated by the OECD (2004) as having failed to make commitments on information exchange. p. 397)) that otherwise satisfied the OECD’s tax haven criteria but were not included on the list because they provided “advance commitments” to eliminate allegedly harmful tax practices. who begin with the list of jurisdictions in Hines and Rice (1994.S. 72.Table 1: List of Tax Havens Country or Territory Tax Haven (DH) Tax Haven (OECD) Andorra* Anguilla Antigua and Barbuda Aruba Bahamas Bahrain Barbados Belize Bermuda British Virgin Islands Cayman Islands Cook Islands Cyprus Dominica Gibraltar 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Grenada Guernsey Hong Kong Ireland Isle of Man Jersey Jordan Lebanon Liberia* Liechtenstein* 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 0 0 1 1 Country or Territory Luxembourg Macao Maldives Malta Marshall Islands* Mauritius Monaco* Montserrat Nauru Netherlands Antilles Niue Panama Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Samoa San Marino Seychelles Singapore Switzerland Tonga Turks and Caicos Islands Vanuatu Virgin Islands (U. and match these with countries and territories for which current data on economic and other characteristics are available. p.) Tax Haven (DH) Tax Haven (OECD) 1 1 1 1 1 0 1 1 0 1 0 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 1 1 0 1 1 0 1 1 1 0 0 1 1 1 1 Source: “Tax haven (DH)” refers to the definition of tax havens used in Dharmapala and Hines (2006). p. all of which also appear in Diamond and Diamond (2002) and various other sources.

Sachs and Mellinger (1999) as the distance by air from the closest of New York.Figure 1: General Characteristics of Tax Havens (Relative to Nonhavens) GDP pc (PPP. Tokyo or Rotterdam.worldbank. Distance by air measures proximity to major capital exporters (constructed by Gallup. Havens=1) Population (Nonhavens=1) Distance by air (Nonhavens=1) Island (fraction) Nonhavens Havens Coastal population (fraction) Telephone Lines pc (Havens=1) Subsoil Assets pc (Nonhavens=1) 0 0.4 0. population and telephone lines per capita are all from the World Bank’s World Development Indicators (WDI).org. Coastal population is the fraction of the population living within 100 km of the coast.2 Source: Authors’ calculations.6 0. based on the dataset used in Dharmapala and Hines (2006). 25 .2 0. also constructed by Gallup. Sachs and Mellinger (1999).8 1 1. for 2004. GDP per capita (in US$ in PPP terms). Subsoil assets per capita are from World Bank (2006). available at http://econ.

UN membership is obtained from the United Nations Organization website.fr/teamperso/mayer/data/data.2 0.univ-paris1. 26 .html. based on the dataset used in Dharmapala and Hines (2006).8 1 Source: Authors’ calculations.un.. (1999). Legal origins and ethnolinguistic fractionalization are from La Porta et al. at http://www.org/Overview/unmember.2 0 0.6 0.htm)The World Bank’s Database of Political Institutions (Beck et al. The use of English as an official language is from the Centre d’Etudes Prospectives et D’Informations Internationale (CEPII) dataset (available on Thierry Mayer’s website at: http://team.4 0. The governance index (for 2004) is from Kauffmann. Kraay and Mastruzzi (2005). 2001).Figure 2: Institutional Characteristics of Tax Havens (Relative to Nonhavens) British legal origin (fraction) French legal origin (fraction) Ethnolinguistic Fractionalization English as an Official Language (=1) Nonhavens Havens Parliamentary System (fraction) UN Member (fraction) Governance Index -0.

ilo.2 1 0. The UK financial sector data includes real estate and insurance.6 Jersey (tens of thousands) 0.org/. based on data from the International Labour Organsation (ILO). available at http://laborsta. Figure 4: Financial Sector Wages in Jersey and the UK.4 1.org/.ilo. 1997-2005 (Pounds/Week) 800 700 600 500 400 UK 300 Jersey 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Authors’ calculations.2 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Authors’ calculations. based on data from the International Labour Organsation (ILO). 27 .Figure 3: Financial Sector Employment in Jersey and the UK. 1997-2005 1. The UK financial sector data includes real estate and insurance.4 0. available at http://laborsta.8 UK (millions) 0.

28 . based on data on FDI and US corporate tax revenues from the US Bureau of Economic Analysis.Figure 5: Payoff Matrix when there is no Tax Haven Country B Tax Rate: 50% Tax Rate: 0% Tax Rate: 50% 110. 150 Tax Rate: 0% 150. 105 105. 100 Tax Rate: 0% 100. available at http://www. 1994-2006 30 25 20 % of US FDI in Tax Havens 15 % of US Federal Tax Revenue from Corporate Taxes 10 5 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 0 Source: Authors’ calculations.gov.bea. 55 100. Tax havens are defined as in Dharmapala and Hines (2006). 110 55. 100 Country A Figure 6: Payoff Matrix when there is a Tax Haven Country B Tax Rate: 50% Tax Rate: 0% Tax Rate: 50% 105. while Figure 8 uses the OECD definition (see Table 1). 105 100. 100 Country A Figure 7: US Investment in Tax Havens and Corporate Tax Revenues.

1994-2006 12 10 8 % of US FDI in OECDdesignated Tax Havens 6 US Corporate Tax Revenue as a % of US GDP 4 2 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0 Source: Authors’ calculations.gov. Figure 9: UK Investment in Tax Havens and Corporate Tax Revenues. 1994-2006 Source: Authors’ calculations. 29 . Tax havens are defined as in Dharmapala and Hines (2006). based on data on FDI and US corporate tax revenues from the US Bureau of Economic Analysis. available at http://www.bea. Tax havens are defined as in OECD (2000) – see Table 1.statistics. available at http://ec. available at http://www. based on data on UK FDI from the UK Office for National Statistics.eu/taxation_customs/taxation/.Figure 8: US Investment in OECD-Designated Tax Havens and Corporate Tax Revenues.uk/ and on data on UK corporate tax revenues from the European Commission’s “Taxes in Europe” database.europa.gov.