Working Paper: NBER ID: w12225
Authors: Joel Slemrod; John D. Wilson
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.
Keywords: No keywords provided
JEL Codes: H26; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax havens (H26) | inefficiency of tax rates set by non-haven countries (H26) |
| elimination of tax havens (H26) | improve welfare in non-haven countries (I39) |
| increase in tax rates by non-haven countries (H26) | more efficient allocation of resources (D61) |
| increase in tax rates by non-haven countries (H26) | increased public good provision (H40) |
| tax havens facilitate tax avoidance (H26) | direct welfare losses for non-haven countries (F69) |
| smaller countries (F55) | greater incentive to become tax havens (H26) |
| initiatives to limit tax havens (H26) | leave all countries better off (F69) |