Tax Havens, Growth, and Welfare

Abstract

This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high-tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare-enhancing if the government expenditure share in production is low, or the initial income tax rate is high.Moreover, the welfare-maximizing income tax rate is lower than the growth-maximizing income tax rate if tax havens are present.

A review of money laundering literature: the state of research in key areas

“…Picard and Pieretti (2011) aimed at observing the effect of pressure policies such as blacklisting and sanctions on offshore financial centres (OFCs hereafter) and their ability to ensure compliance with AML regulations. Instead of analysing the desirability or harm of tax havens (Alstadsaeter et al, 2018;Christensen, 2012;Chu et al, 2015), Picard and Pieretti focused on the incentives for offshore governments and banks to comply with AML regulations. They found that offshore banks would comply under pressure policies provided the pressure had potential to harm the reputation of investors.…”

The Political Economy of the International Tax Transparency Agenda in the G20/OECD Context

“…While international tax transparency can function as a global public good, such coordination can also have drawbacks. First, coordination is not always growth or welfare-enhancing as the effects on capital accumulation and investment can be ambiguous (Chu et al, 2014). The institutional set-up matters and so does whether countries are capital exporting or importing (Bacchetta and Espinoza, 1995).…”