Tax Havens, Growth, and Welfare

Hsun Chu, Ching-chong Lai and Chu-chuan Cheng

MPRA Paper from University Library of Munich, Germany

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.

Keywords: tax havens; endogenous growth; optimal income tax (search for similar items in EconPapers)
JEL-codes: H21 H26 O11 O40 (search for similar items in EconPapers)
Date: 2013-09, Revised 2013-09
New Economics Papers: this item is included in nep-acc, nep-dge, nep-fdg, nep-pbe and nep-pub
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Journal Article: Tax Havens, Growth, and Welfare (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52878

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