June 2006 Vol. VI, Issue III
Tax Havens, Tax Competition and Economic Performance
Low-tax jurisdictions play a valuable role in the global economy. Economic rearch indicates that so-called tax havens provide a tax -efficient platform for cross-border investments, help boost saving and investment, and thus increa global economic growth. Tax havens also encourage good policy in non-haven countries. In part becau of jurisdictional competition, maximum tax rates on personal income have fallen by about 23 percentage points since 1980 and top tax rates on corporate income have fallen by almost 20 percentage points. The policies have boosted growth and job creation.鼻塞的原因
The United States is the world's largest beneficiary of tax havens and tax competition, both becau the U.S. is a tax haven for foreigners and becau tax havens facilitate the flow of capital to the American economy. Foreigners have more than $11 trillion invested in the U.S. economy, including more than $7 trillion invested in America's financial markets. Nearly $1.3 trillion is placed in the U.S. financial system by Caribbean institutions. This money helps finance America's economic growth.
By Yesim Yilmaz
What are tax havens?
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Tax havens are countries with very low tax rates t—sometimes as a matter of long-standing policy and sometimes as a recent and deliberate strategy to draw out-of-jurisdiction investment. This definition is impreci, but for a good reason:1 many additional characteristics including the nature of corporate registrations, requirements on beneficial ownership information, rules governing trusts, and the financial privacy companies and individuals enjoy could qualify a jurisdiction as a tax haven. In British Virgin Islands, Delaware, and Panama, one can incorporate a company within a few hours with little information about ownership and nature of work. Switzerland, Singapore and Cayman Islands are among countries that generally do not disclo information on personal financial transactions.2 1 Any country or region could potentially qualify as a tax haven; therefore, the lists of tax havens vary greatly from one publication to the next. The IMF [IMF, 2000] for example, has a list of sixty-four offshore financial centers, including the United States; Diamond and Diamond [2002] discuss venty-one havens in detail, and mention 20 or so more. 2 Hines [2004] identifies ven large countries (Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore and Switzerland) and approximately twenty-six very small ones as tax havens important for US business purpos. The countries are in direct competition with the United States—both for investment from third parties and for investment from the United States. In 1999, the countries accounted for four-fifths of a percent of the world population, and slightly more than two percent of the world’s production. During the
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P ROSPERITAS A Policy Analysis from the Center for Freedom and Prosperity Foundation
Interestingly, the United States qualifies as a tax haven for both the federal rules that govern foreigners’ income, and the state rules on corporate taxation, registration and privacy. Compared to U.S. taxpayers, non-resident aliens pay low or no taxes on investment income—an important characteristic of tax havens according to the Organization for Economic Cooperation and Development, an obdurate opponent of tax competition. The federal government generally does not tax the investment income of a foreign corporation if the earnings are unconnected with a U.S. trade or business, and foreigners are not required to pay taxes on their investment income from U.S. business unless they reside within the United States [Mitchell, 2001].
Furthermore, states offer many additional tax benefits designed to attract out-of-state investments, and the federal government generally does not have the authority to override the decisions. Nevada, Texas, Wyoming, and Washington do not tax corporate income; Alaska, Delaware and Nevada do not collect beneficiary information on registered companies; in Wyoming, corporations can take advantage of nominee bank accounts that protect ownership identity; and trusts in Delaware do not have public filings or recordings, and do not generally require accounting [ITIO and STEP, 2002]. Additionally, tax rules are “negotiable” in many states, and many large out-of-state inv
estors are able to get concessions in return for investing within the state. 3
The prence of tax havens has two important implications for the world economy: First, tax havens reduce the effective marginal tax rate on capital and, as a result, create more incentives to save and invest. Becau the cost of doing business in (or through) tax havens is lower, business operating in or through the countries can undertake investments with lower expected returns or higher risks than tho in high-tax jurisdictions. With the new investment opportunities, individuals will most likely consume less (or keep a smaller share of their wealth in non-income generating asts such as homes, artwork, or commodities), and save and invest more. It is important to note that some portion of incread savings and investment reprent funds that would have been paid as taxes in a high-tax jurisdiction, some of the funds are capital people reallocate from other sources in their portfolio to take advantage of investment opportunities that were not previously available, and some of the funds reprent a shift from consumption and into new capital.
Second, tax havens curb the size of the public ctor, and force governments to cut taxes and improve efficiency in public rvice delivery. By providing a “low-tax” alternative for mobile taxable resources, tax havens make it difficult for politicians of the world to divert funds from the private ctor to the public ctor. In fact, since the 1980s, effective corporate income tax rates across the i
ndustrialized world have fallen by nearly fifteen percentage points, and statutory tax rates have dropped by almost 20 percentage same year, U.S. multinational companies held sixteen percent of their total asts and realized thirty percent of their net income in tax havens.
3 The Supreme Court has shied away from hindering the right of states to offer tax incentives for out-of-state corporations.
points [Hines, 2005]. During the same period, tax haven activities as a share of world economic output have incread eight-fold. Without tax competition from tax havens, the sweeping reduction in corporate tax rates would n ot have been possible (e Figure 1). Personal income tax rates also have fallen dramatically, with top rates in industrialized nations dropping by more than twenty percentage points since 1980 (e Figure 2).
To keep their tax bas intact in the prence of competition from low-tax jurisdictions, politicians must reduce public spending, cut taxes on mobile taxable resources, or shift a relatively larger portion of their tax revenues to less destructive forms of taxation impod on labor and consumption. Needless to say, shifting taxes to immobile bas is a daunting endeavor with high pol
itical costs. Taxing immobile sources would make the tax system more “efficient” (and evasion more difficult), but from the politician’s perspective, tax hikes on bread, milk, and payrolls are extremely unpalatable. Not surprisingly, faced with jurisdictional tax competition from tax havens, governments have invariably chon to reduce tax rates on corporate and personal incomes. For example, the reductions in the effective tax rates since 1980s are almost entirely due to tax rate reductions by governments (and a small percent is due to capital moving out).
Do international tax rules matter?
Studies that look at the relation between foreign direct investment and after-tax rates of returns on investment consistently find a strong, positive correlation. Among other things, this relation reflects the extent to which investors respond to tax incentives [Hines, 1999]. U.S. multinational firms invest fewer dollars in countries with high tax rates, whether direct taxes on corporate income, or indirect taxes levied on things other than the corporate income—for example payroll taxes, licen fees, etc. [Desai, et al., 2006]. The u of indirect taxes expanded considerably recently, and business have become very nsitive to indirect tax rates in making their investment decisions. One study finds that U.S.-owned affiliates of multinational companies tend to reduce their ast holdings by 7.1 percent in countries with 10-percent higher indirect tax rates (measured across countries). A 10-perc
ent increa in corporate taxes, on the other hand, results in a 6.6 percent decline in the total asts held [Desai, et al., 2004].4
Other evidence on the relation between international tax rules and business investment decisions includes the financing and structuring of companies, particularly since equity and debt are treated equally in low-tax countries5 [Desai, et al., 2004], low overall tax liabilities [Harris, et al., 1991] and low tax/sales ratios obrved for multinationals with tax haven prence [Desai, et al., 2003].6
Becau international tax rules matter for business investment decisions, governments cannot ignore the impact of lower taxes in other jurisdictions. Low tax rates elwhere attract investors and reduce the tax ba in the home country, and significant evidence supports the view that countries react to losing “market share” in foreign direct investment by reducing their effective tax rates. For example, the average effective tax
4 Desai et al. [2004] also show that on the output side, higher indirect taxes have a larger impact on output, compared to higher corporate taxes: a 10 percent hike in indirect tax rates reduce output by 2.9 percent, while a similar change in direct taxes is associated by 1.9 percent less output.
5 This is becau companies are more likely to u debt for financing in high tax jurisdictions, which
typically allow a tax deduction for the interest on debt.
6 Another indirect evidence of business’ nsitivity to international taxes is the reported increas in U.S. multinationals’ domestic returns relative to their foreign returns to equity following the 1986 tax cuts [Klasn, et al., 1993] Hines [2004] prents a detailed discussion of this evidence.
rate in manufacturing (measured across 58 countries with significant U.S. multinational prence) has gone down from 33 percent in 1980 to 21 percent in 2000 (Table 1).
春是几声Tax cuts instituted in respon to tax competition appear to be the biggest factor behind the reductions between 1992 and 1998 [Altshuler and Grubert, 2004]. The evidence shows that countries suffering the greatest loss of capital were most likely to reduce tax rates. Additionally, tho nations with high initial average effective tax rates cut tax rates more than the average country.
manufacturing exhibited
another big dip between 1998
and 2000 and empirical studies
suggest that company behavior
(and not country behavior)
helps explain the decline. In
other words, companies took
advantage of tax differentials
by shifting economic activity
among jurisdictions in ways
that lowered their overall tax
burdens. For this brief period,
variables such as initial tax
rates, share of foreign direct
investment, and country size
lo their explanatory power.
The prevailing statutory tax
rate, however, exhibits strong
positive correlation with the
declines in the effective tax
rates. High statutory tax rates
cau changes in company
behavior becau of incentives
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to reorganize in ways that
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reduce effective tax rates.
风景的说说To take advantage of low effective tax rates elwhere, companies more frequently organize as hybrid firms (treated as branches from the U.S. point of view but incorporated as entities in the hosting tax haven country), or create ownership chains (which involve foreign affiliates owning other foreign affiliates in tax haven countries). While hybrids shelter payments of interest and royalties to a tax haven company from U.S. taxation [Altshuler and Grubert, 2004], ownership chains reduce tax obligations by indefinitely deferring the repatriation of retained earnings [Desai, et al., 2006]. Both strategies have become more prominent recently. Setting up of hybrids has been greatly
simplified since 1997, and between 1982 and 1998, share of indirectly owned affiliates
