Do Tax Havens Flourish?

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Tax haven countries offer foreign investors low tax rates and other tax features designed to attract investment and thereby stimulate economic activity. Major tax havens have less than 1 percent of the world's population (outside the United States) and 2.3 percent of world gross domestic product (GDP), but they host 5.7 percent of the foreign employment and 8.4 percent of foreign property, plant, and equipment of American firms. Per capita real GDP in tax haven countries grew at an average annual rate of 3.3 percent between 1982 and 1999, which compares favorably to the world average of 1.4 percent. Tax haven governments appear to be adequately funded: their average 25 percent ratio of government to GDP exceeds the 20 percent ratio for the world as a whole, though the small populations and relative affluence of these countries would normally be associated with even larger governments. Whether the economic prosperity of tax haven countries comes at the expense of higher tax countries is unclear. Recent research suggests that tax haven activity stimulates investment in nearby high-tax countries.


Copyright 2005 National Bureau of Economic Research and the Massachusetts Institute of Technology. Originally published in Tax Policy and the Economy, 19, 2005.