Tax Competition With Parasitic Tax Havens

Joel Slemrod () and John Douglas Wilson

No 12225, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H26 H87 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
Date: 2006-05
Note: PE
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