46 Pages Posted: 24 Aug 2011 Last revised: 1 Apr 2013
Date Written: March 29, 2013
We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker’s (1968) economic theory of crime, we identify the tax evasion component in foreign portfolio investment data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets.
Keywords: Foreign Portfolio Investment, Tax Havens, Tax Evasion
JEL Classification: F21, G15, H26, M41
Suggested Citation: Suggested Citation
Hanlon, Michelle and Maydew, Edward L. and Thornock, Jacob R., Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets (March 29, 2013). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1915429 or http://dx.doi.org/10.2139/ssrn.1915429