Which Countries Become Tax Havens?

30 Pages Posted: 21 Dec 2006 Last revised: 17 Jul 2009

Dhammika Dharmapala

University of Chicago Law School

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Controlling for other relevant factors, governance quality has a statistically significant and quantitatively large association with the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 26 percent to 61 percent as governance quality improves from the level of Brazil to that of Portugal. Evidence from US firms suggests that low tax rates offer much more powerful inducements to foreign investment in well-governed countries than do low tax rates elsewhere. This may explain why poorly governed countries do not generally attempt to become tax havens, and suggests that the range of sensible tax policy options is constrained by the quality of governance.

Keywords: Tax havens, governance, corporate taxation, foreign direct investment

JEL Classification: H87, H25, K10

Suggested Citation

Dharmapala, Dhammika and Hines Jr., James R., Which Countries Become Tax Havens? (May 2009). Available at SSRN: https://ssrn.com/abstract=952721 or http://dx.doi.org/10.2139/ssrn.952721

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

James Rodger Hines

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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