Economic Effects of Regional Tax Havens

Mihir A. Desai, C. Fritz Foley and James Hines

No 10806, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F21 F23 H87 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-pbe
Note: CF IFM PE
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Citations: View citations in EconPapers (19)

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