Which Countries Become Tax Havens?

50 Pages Posted: 5 Jan 2007 Last revised: 26 Jun 2010

See all articles by Dhammika Dharmapala

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: December 2006

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. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on 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 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal. The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which 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.

Suggested Citation

Dharmapala, Dhammika and Hines, James Rodger, Which Countries Become Tax Havens? (December 2006). NBER Working Paper No. w12802. Available at SSRN: https://ssrn.com/abstract=955235

Dhammika Dharmapala

University of Chicago Law School ( email )

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

James Rodger Hines (Contact Author)

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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