Tax Competition with Parasitic Tax Havens

44 Pages Posted: 6 Oct 2006  

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

John D. Wilson

Michigan State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

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.

Suggested Citation

Slemrod, Joel B. and Wilson, John D., Tax Competition with Parasitic Tax Havens (May 2006). NBER Working Paper No. w12225. Available at SSRN: https://ssrn.com/abstract=902577

Joel B. Slemrod (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Room R5396
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National Bureau of Economic Research (NBER)

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John D. Wilson

Michigan State University - Department of Economics ( email )

East Lansing, MI 48824
United States

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