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DO TAX HAVENS FLOURISH? James R. Hines Jr. Working Paper 10936 http://www.nber.org/papers/w10936 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 2004
I am indebted to Claudia Martinez for excellent research assistance, to her and to Rosanne Altshuler, Reuven Avi-Yonah, Daniel Mitchell, Joel Slemrod, and particularly James Poterba, for helpful comments on previous drafts of this paper.The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2004 by James R. Hines Jr.. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Do Tax Havens Flourish? James R. Hines Jr. NBER Working Paper No. 10935 November 2004 JEL No. H87, H25 ABSTRACT Tax haven countries offer foreign investors low tax rates and other tax features designed to attract investment and thereby stimulate economic activity. Major tax havens have less than one percent of the world's population (outside the United States), and 2.3 percent of world GDP, but host 5.7 percent of the foreign employment and 8.4 percent of foreign property, plant and equipment of American firms. Per capita real GDP in tax haven countries grew at an average annual rate of 3.3 percent between 1982 and 1999, which compares favorably to the world average of 1.4 percent. Tax haven governments appear to be adequately funded, with an average 25 percent ratio of government to GDP that exceeds the 20 percent ratio for the world as a whole, though the small populations and relative affluence of these countries would normally be associated with even larger governments. Whether the economic prosperity of tax haven countries comes at the expense of higher tax countries is unclear, though recent research suggests that tax haven activity stimulates investment in nearby high-tax countries. James R. Hines Jr. Department of Economics University of Michigan 611 Tappan Street Ann Arbor, MI 48109-1220 and NBER email@example.com
Introduction. Countries design their tax systems to fit circumstances and opportunities, and as a
consequence, tax regimes exhibit considerable diversity. Countries known as “tax havens” offer very low tax rates and other tax features that make them particularly attractive to foreign investors. Rising volumes of international investment contribute to the growing importance of tax havens, which in turn has exposed tax haven activities to greater attention, and has prompted a number of policy responses in higher-tax countries. The purpose of this paper is to review the use of tax havens by international businesses, and to evaluate the effect of their tax systems on economic outcomes in tax haven countries and elsewhere. Countries offer low tax rates in the belief that, by doing so, they attract greater investment and economic activity than would otherwise have been forthcoming. The extent to which this expectation is fulfilled certainly varies, though there are spectacular examples of tax haven countries, such as Ireland, that have enjoyed very rapid economic growth rates that coincide with dramatic inflows of foreign investment. The empirical evidence presented in section 4 confirms that Ireland’s experience, while extreme, is not anomalous, in that tax haven countries as a group exhibited 3.3 percent annual per capita GDP growth from 1982-1999, whereas the world averaged just 1.4 percent annual GDP growth over the same period. While national economic statistics, particularly those describing the performance of small tax havens, must always be treated with some caution, the available indicators consistently show that tax haven economies outperform the economies of other countries. Controlling for country size, initial wealth, and other observable variables, does not change the...
Table 1: Tax Havens in the World Economy (1999) U.S
Population All Tax Havens Selected Big-7: Hong-Kong Ireland Panama Singapore Switzerland Selected Dots: Antigua & Barbuda Bahamas Bermuda Luxembourg All Havens, 1982 0.001% 0.006% 0.001% 0.009% 0.7% 0.136% 0.076% 0.057% 0.080% 0.145% 0.8%
Table 2: Annual per capita real income growth rates, 1982-1999 GDP World Development Indicators 1.7% 2.6% GNP Penn World Table 1.4% 3.0%
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