Nadine Riedel
15 October, 2012

In recent years, the literature has brought forward interesting insights and stimulating new research activities, but many of the central questions still remain  unanswered.

For some time, the policy and academic debate has treated tax haven economies (as defined by conventional tax haven lists) as a homogenous group of countries, implicitly suggesting that they are characterised by a common set of institutional features which make them attractive for investors who aim to evade or avoid taxation.

Recent papers, however, clarify that institutions differ across “tax havens”. While some offer low income tax rates, others provide secrecy and a high level of intransparency, again others offer both. Different types of havens may attract different types of investors and very different types of income (corporate vs. private investors, tax evaders vs. avoiders, income related to legal vs. criminal activities) and the welfare consequences may be very different depending on the institutional setting. Research on these issues is still in its infancy and clearly should be given higher priority in the years to come. 

Recent findings moreover challenge the widespread perception that it is mainly small tropical island countries which are the culprits in international tax evasion (from the developing world). Instead, OECD countries, like the UK and the US, may be equally (or even more) important players in the tax evasion industry.


In an intriguing paper, Sharman (2010)1 assesses the level of transparency and secrecy of a number of jurisdictions by trying to find anonymous corporate vehicles without proof of identity and create a bank account for the shell company. Strikingly, the majority of Sharman’s successful approaches were to service providers in OECD countries, not in tax haven economies. While founding an anonymous shell corporation in general turned out to be relatively easy, establishing a corporate bank account for the vehicle while preserving anonymity was more difficult (although not impossible). Sharman interprets his findings in the sense that anonymous participation in global financial and banking networks is possible. A more recent paper corroborates these findings using a somewhat more sophisticated research design. However, while shell companies may be helpful in disguising the illicit origins of income, related to e.g. drug trade, organized crime, terrorism and corruption, their usefulness in reducing an investor’s tax burden and thus in channeling income out of the developing world for tax purposes is a priori less clear since OECD countries in Sharman’s study levy comparably high tax rates. More research along these lines would be fruitful.

Tax havens and corruption

Another interesting idea from recent academic and political debate on tax haven economies is their role in deteriorating the quality of institutions in developing countries. Many observers suggest that tax havens may facilitate corruption and thus encourage rent seeking behavior and provide incentives for political leaders to maintain weak institutions. Evidence on the link between tax haven presence and corrupt activities is largely lacking though and so far restricted to anecdotes. A recent paper by Andersen, Lassen, Johanessen and Paltseva (2012) assesses the link between political corruption and foreign wealth holdings in the context of petroleum-rich countries, following the idea that rents from natural resources are prone to being converted into personalised political rents. The authors' key finding is that, in autocracies, increases in rents from oil and gas extraction significantly raise bank deposits held in havens whereas, in democratic and intermediate regimes, there is no such effect. The effects turn out economically significant, suggesting that up to 6%-10% of oil and gas rents in autocracies appear as hidden wealth. The authors interpret this result as evidence that, when political institutions are sufficiently weak, windfall gains from oil and gas production are partly captured by political elites and hidden in havens.

The paper is interesting and thought-provoking and, in general, the first to take on the challenge of empirically identifying the link between political rents and tax haven presence (two variables which are by definition difficult to measure as agents try to hide these activities). Nevertheless, there are a number of alternative interpretations of the results. Most importantly, oil and gas windfall gains may lead to higher incomes more widely in the domestic economy which may then be transferred to tax havens and captured in the authors’ analysis. The authors argue that this interpretation is less plausible as firstly, significant oil producers such as Saudia Arabia, Kuwait, United Arab Emirates and Quatar have no income taxes and incentives for international tax evasion are thus absent and secondly, most of the other autocracies in their sample are developing countries where tax enforcement is typically low suggesting that simpler tax evasion techniques are available than those involving foreign bank accounts.

The latter argument may be hard to swallow as it implies that income relocations from developing countries to tax havens are not at all motivated by tax evasion. Even if this holds true, individuals may want to transfer income from autocratic regimes because they fear the expropriation of their funds. In general, acknowledging institutional differences between tax havens again appears to be important in this context since transfers of political rents to tax havens seem first and foremost related to secrecy and intransparency provided by some haven economies, not to low income tax rates (especially if tax evasion incentives are indeed absent as stressed by the authors). It might be interesting to develop this research further, e.g. by analysing whether responses are heterogeneous in havens with different institutional features.  

The welfare effects of tax havens

On a related note, several theoretical contributions stress that the welfare effects of tax haven economies on the developing world may actually be positive. A theoretical paper by Hong and Smart (2010) suggests that (developing) countries may gain from tax haven activities as they allow companies to reduce their effective tax burden which may increase investment activities and induce positive welfare effects through job creation and technological spillovers to the local economy. The empirical identification of a causal link between tax haven presence and corporate investment activities has, however, proved difficult so far. In a recent paper, Blanco and Rogers (2011)show – based on panel data for 142 countries – that less developed countries in the neighborhood of tax havens exhibit significantly larger FDI inflows. The authors interpret their results to reflect that the increase in FDI is caused by the geographical proximity to tax haven countries. 

While thought-provoking, it's important to substantiate the authors’ findings further before drawing policy conclusions. Most importantly, as the identification strategy is based on cross-sectional variation in geographical proximity to tax haven economies, one cannot exclude that the results are confounded by underlying differences between the host countries which may drive both the presence of tax havens and FDI inflows.


Developing the analysis further by exploiting exogenous variation in tax haven presence which allows controlling for time-constant host country differences may be a fruitful way forward. 


1. See Findley, M., D. Nielson and J. Sharman (2012), Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies, mimeo, Griffith University