This essay reviews the academic literature on the potential positive effects of tax havens on non-haven industrialized countries. It starts with briefly defining tax havens in section 2. In section 3, the essay outlines the traditional "negative" view on tax havens and the prevalence of this view in empirical literature. Section 4 contrasts the preceding section and investigates the emerging "positive" view on tax havens. The conclusion answers the research questions and summarises the most important findings.
The public image of tax havens is "traditionally" negative. Scandals in the past (e.g. Liechtenstein Affaire, Panama Papers) elucidated the role a tax haven may play for a variety of high net worth individuals and/or political figures as a secrecy-jurisdiction to facilitate illegal activities, such as the evasion of taxes and/or safe-keeping/hiding of illicit earnings. Non-governmental organizations (such as the Tax Justice Network and the Global Finance Integrity) denounced the spread of tax havens and published listings of havens they deem potentially harmful to the global economy. Academic literature also highlights how tax havens exacerbate harmful tax competition and allow multinational corporations to avoid taxes in developed and developing countries alike through tax planning, thus being of "parasitic" nature for the global economy.
Table of Contents
1. Introduction
1.1 Problem Statement
1.2 Objective of the Essay
1.3 Organisation of the research
2. Definition of Tax Haven
3. The Traditionally Negative View on Tax Havens
3.1 Tax Planning
4. Can Tax Havens be Beneficial?
4.1 Keen (2001)
4.2 Hong and Smart (2010)
4.3 Chu, Lai and Cheng (2013)
4.4 Desai et al. (2006)
4.5 Additional Literature
4. Conclusion
Research Objectives and Topics
This essay examines the academic literature surrounding the economic impact of tax havens, specifically investigating whether their existence can yield positive effects for industrialized non-haven economies. By analyzing the tension between base erosion and potential investment stimulation, the study seeks to answer whether the negative perception of tax havens is fully justified or if they may serve a beneficial function in a globalized economy.
- The traditional negative view of tax havens and their role in facilitating illicit activities.
- Mechanisms of corporate tax planning, including transfer pricing and conduit companies.
- Theoretical models contrasting the "parasitic" nature of tax havens against welfare-enhancing investment effects.
- Empirical analysis of multinational corporations' behavior and the impact of tax havens on host economy development.
Excerpt from the Book
3. The Traditionally Negative View on Tax Havens
The “traditional” negative view focalizes the adverse effects the existence of tax havens may have on the economic and political development of non-haven countries. Torvik (2009) stresses that tax havens will negate the development of sound and strong institutions, further exacerbating the problem of money laundering by corrupt politicians, e.g. dictators. Schwarz (2011) supports this argument, finding that money laundering and tax havens are closely associated. Hebous and Lipatov (2011) underline how dictators make the decision in their personal utility optimum to shift bribes to tax havens. Both also find a strong association between the activities of multinational corporations (MNC) in very corrupt nations and in tax havens (ibid.).
Boyce and Ndikumana investigate the problem of capital flight from numerous African states. They argue that the capital flight drastically exceeds the stock of debt African countries have accumulated, thus making Africa a “net creditor to the rest of the world” (Boyce and Ndikumana, 2012, p. 1). Moreover, they argue that the existence of tax havens exacerbates this effect, enabling and spurring capital flight, and, consequently, retarding the pursuit of development. Slemrod and Wilson (2009) model the parasitic nature of tax havens on the economies of non-haven countries. They state that tax havens prevent the efficacy in resource expenditure in both haven and non-haven countries. Tax havens expend the development of “concealment services” to enable corporate tax planning, whilst non-haven countries expend on the enforcement to combat tax avoidance. The authors argue that tax havens intensify harmful tax competition, driving corporate tax rates to lower levels than non-haven countries would otherwise set, provoking, in the view of some commentators, a “race to the bottom”. In turn, tax bases are eroded, thus lowering the share of public investments.
Summary of Chapters
1. Introduction: Outlines the negative public perception of tax havens and introduces the research question regarding their potential positive economic impact on non-haven countries.
2. Definition of Tax Haven: Provides a theoretical and institutional definition of tax havens, highlighting their role as low-tax environments and their characteristics regarding secrecy and information exchange.
3. The Traditionally Negative View on Tax Havens: Discusses the adverse impacts of tax havens, such as institutional decay, capital flight, and the erosion of tax bases in industrialized nations.
3.1 Tax Planning: Explains the technical methods utilized by multinationals, such as transfer pricing and thin capitalization, to exploit tax differentials between jurisdictions.
4. Can Tax Havens be Beneficial?: Contrasts the negative view by presenting theoretical and empirical arguments suggesting that tax havens can stimulate investment and improve welfare under certain conditions.
4.1 Keen (2001): Examines how preferential tax regimes can potentially mitigate the severity of tax competition.
4.2 Hong and Smart (2010): Analyzes a general equilibrium model showing how tax planning can influence the optimal corporate tax rate and domestic investment in non-haven countries.
4.3 Chu, Lai and Cheng (2013): Explores ambiguous welfare effects of tax havens by incorporating imperfect competition and public production externalities into the model.
4.4 Desai et al. (2006): Reviews empirical data on US-multinational activities to identify the drivers for the demand of tax havens, specifically regarding holding companies and intangible assets.
4.5 Additional Literature: Discusses further studies on economic growth in tax havens and the unintended consequences of eliminating them, referencing the Puerto Rico case.
4. Conclusion: Summarizes the debate between the two opposing forces of tax havens and suggests that the impact on developed economies remains a subject of ongoing academic and policy dispute.
Keywords
Tax Havens, Tax Planning, Corporate Taxation, Multinational Corporations, Tax Competition, Foreign Direct Investment, Welfare Economics, Base Erosion, Profit Shifting, Fiscal Policy, Offshore Wealth, Economic Development, Transfer Pricing, Capital Flight, Global Economy
Frequently Asked Questions
What is the core subject of this essay?
The essay focuses on the economic role of tax havens, specifically challenging the traditional narrative that they are purely harmful by examining literature that highlights potential benefits for developed economies.
What are the central themes discussed?
Key themes include the impact of tax havens on global tax competition, the mechanics of international tax planning, the relationship between investment stimulation and base erosion, and the influence of tax havens on institutional development.
What is the primary research goal?
The primary goal is to investigate whether the deleterious effects often attributed to tax havens are potentially exaggerated and whether they can exert a positive, welfare-enhancing influence on non-haven economies.
Which scientific methods are employed?
The study utilizes a literature review approach, synthesizing various theoretical models—such as general equilibrium models—and empirical analyses from academic papers to contrast different viewpoints.
What topics are covered in the main body?
The main body covers definitions of tax havens, the technical mechanisms of tax avoidance (like transfer pricing), and detailed reviews of scholarly work by authors like Keen, Hong, Smart, and Desai regarding the potential economic utility of these jurisdictions.
Which keywords best characterize this work?
Central keywords include tax havens, tax planning, profit shifting, fiscal policy, and foreign direct investment (FDI).
How does the author define the "parasitic" nature of tax havens?
The author references Slemrod and Wilson (2009) to describe how tax havens drain resources by necessitating expensive enforcement measures in non-haven countries and triggering a "race to the bottom" regarding corporate tax rates.
What specific role do intangible assets play in tax haven utilization?
According to the analysis of Desai et al. (2006), multinationals owning and selling intangible assets, such as those that are R&D-intensive, show a significantly higher propensity to establish and utilize tax haven affiliates.
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- Nicolai Struck (Autor), 2020, The opportunities Tax Havens offer, Múnich, GRIN Verlag, https://www.grin.com/document/913960
