NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Economic Effects of Regional Tax Havens

Mihir A. Desai, C. Fritz Foley, James R. Hines

NBER Working Paper No. 10806
Issued in October 2004
NBER Program(s):   CF   IFM   PE

How does the opportunity to use tax havens influence economic activity in nearby non-haven countries? Analysis of affiliate-level data indicates that American multinational firms use tax haven affiliates to reallocate taxable income away from high-tax jurisdictions and to defer home country taxes on foreign income. Ownership of tax haven affiliates is associated with reduced tax payments by nearby non-haven affiliates, the size of the effect being equivalent to a 20.8 percent tax rate reduction. The evidence also indicates that use of tax havens indirectly stimulates the growth of operations in non-haven countries in the same region. A one percent greater likelihood of establishing a tax haven affiliate is associated with 0.5 to 0.7 percent greater sales and investment growth by non-haven affiliates, implying a complementary relationship between haven and non-haven activity. The ability to avoid taxes by using tax haven affiliates therefore appears to facilitate economic activity in non-haven countries within regions.

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Document Object Identifier (DOI): 10.3386/w10806

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