Working Paper: NBER ID: w10806
Authors: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
Abstract: How does the opportunity to use tax havens influence economic activity in nearby non-haven countries? Analysis of affiliate-level data indicates that American multinational firms use tax haven affiliates to reallocate taxable income away from high-tax jurisdictions and to defer home country taxes on foreign income. Ownership of tax haven affiliates is associated with reduced tax payments by nearby non-haven affiliates, the size of the effect being equivalent to a 20.8 percent tax rate reduction. The evidence also indicates that use of tax havens indirectly stimulates the growth of operations in non-haven countries in the same region. A one percent greater likelihood of establishing a tax haven affiliate is associated with 0.5 to 0.7 percent greater sales and investment growth by non-haven affiliates, implying a complementary relationship between haven and non-haven activity. The ability to avoid taxes by using tax haven affiliates therefore appears to facilitate economic activity in non-haven countries within regions.
Keywords: No keywords provided
JEL Codes: H87; F23; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax haven ownership (H26) | Reduced tax payments by nearby nonhaven affiliates (H29) |
| Establishment of tax haven operations (H26) | Lower tax liabilities in high-tax jurisdictions (H26) |
| Establishment of tax haven affiliate (H26) | Increase in sales and investment growth for nonhaven affiliates (O16) |
| Higher GDP growth rates (O49) | Increased foreign direct investment in nonhaven countries (F64) |
| Increased foreign direct investment in nonhaven countries (F64) | Establishment of tax haven affiliates (H26) |