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Tax Competition With Parasitic Tax Havens

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Author Info
Joel Slemrod
John D. Wilson

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Abstract

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries. The havens use real resources to help companies camouflage their home-country tax avoidance, and countries use resources in an attempt to limit the transfer of tax revenues to the havens. The equilibrium price for this service depends on the demand and supply for such protection. Recognizing that taxes on wage income are also evaded, we solve for the equilibrium tax rates on mobile capital and immobile labor, and we demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries, in part because countries would be induced to increase their tax rates, which they have set at inefficiently low levels in an attempt to attract mobile capital. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolishment of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12225.

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Date of creation: May 2006
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Handle: RePEc:nbr:nberwo:12225

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Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-25, April.
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  2. Qing Hong & Michael Smart, 2006. "In praise of tax havens: International tax planning and foreign direct investment," Working Papers tecipa-265, University of Toronto, Department of Economics. [Downloadable!]
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  3. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November. [Downloadable!] (restricted)
  4. James R. Hines Jr., 2005. "Do Tax Havens Flourish?," NBER Chapters, in: Tax Policy and the Economy, Volume 19, pages 65-100 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Elitzur, Ramy & Mintz, Jack, 1996. "Transfer pricing rules and corporate tax competition," Journal of Public Economics, Elsevier, vol. 60(3), pages 401-422, June. [Downloadable!] (restricted)
  6. Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Blackwell Publishing, vol. 93(1), pages 75-88.
  7. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January. [Downloadable!] (restricted)
  8. Eckhard Janeba & Michael Smart, 2003. "Is Targeted Tax Competition Less Harmful than its Remedies?," Asia-Pacific Financial Markets, Springer, vol. 10(3), pages 259-280, May. [Downloadable!] (restricted)
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  9. Roger H. Gordon & Jeffrey K. Mackie-Mason, . "Why is There Corporate Taxation in a Small Open Economy? The Role of Transfer Pricing and Income Shifting," EPRU Working Paper Series 93-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  10. James R. Hines, Jr. & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier. [Downloadable!] (restricted)
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  12. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December. [Downloadable!] (restricted)
  13. Helmuth Cremer & Firouz Gahvari, 1997. "Tax Competition and Tax Evasion," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 24, pages 89-104. [Downloadable!]
  14. Palan, Ronen, 2002. "Tax Havens and the Commercialization of State Sovereignty," International Organization, Cambridge University Press, vol. 56(01), pages 151-176, February. [Downloadable!]
  15. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October. [Downloadable!] (restricted)
  16. Ronen Palan, 2002. "Tax Havens and the Commercialization of State Sovereignty," International Organization, MIT Press, vol. 56(1), pages 151-176, February. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bucovetsky, Sam & Haufler, Andreas, 2006. "Preferential tax regimes with asymmetric countries," Discussion Papers in Economics 1209, University of Munich, Department of Economics. [Downloadable!]
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  2. Nicolas Marceau & Steeve Mongrain & John D. Wilson, 2007. "Why Do Most Countries Set Higher Tax Rates on Capital?," Discussion Papers dp07-09, Department of Economics, Simon Fraser University. [Downloadable!]
    Other versions:
  3. Andreas Haufler & Marco Runkel, 2008. "Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Dhammika Dharmapala, 2008. "What Problems and Opportunities are Created by Tax Havens?," Working Papers 0820, Oxford University Centre for Business Taxation. [Downloadable!]
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  5. Marcel Gérard, 2006. "Reforming the Taxation of Multijurisdictional Enterprises in Europe, a Tentative Appraisal," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Clemens Fuest, 2008. "The European Commission´s Proposal for a Common Consolidated Corporate Tax Base," Working Papers 0823, Oxford University Centre for Business Taxation. [Downloadable!]
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  8. Marcel Gerard, 2006. "Reforming the taxation of Multijurisdictional Enterprises in Europe, "Coopetition" in a Bottom-up Federation," Working Papers 2006-10, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
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