Competition between Tax Havens: Does Geographic Distribution Matter?
24 Pages Posted: 23 Jul 2009
Date Written: November 11, 2008
We investigate competition between tax havens and how this competition is related to geographic distribution. We study the extent to which proximity to the nearest tax haven affects foreign direct investment and the number of American affiliates in a tax haven. Empirical results show that distance to the nearest tax haven is positively related to FDI inflows and the number of American affiliates in tax havens. These findings suggest that tax havens compete with each other in a potentially harmful manner. Interestingly, we also find evidence of positive spillovers: the number of American affiliates in a tax haven and its closest tax haven neighbor is positively related. This finding suggests that agglomeration benefits are important for firms and that the nature of the competition between tax havens changes once there is a subsidiary in the nearby tax haven.
Keywords: Tax havens, Tax Competition, Foreign Direct Investment, Spatial Econometrics
JEL Classification: H87, F21
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