Gimme shelters: benefits of tax havens

Reason, March, 2005 by Julian Sanchez

LOW-TAX ZONES such as Hong Kong, Ireland, and various Caribbean nations are routinely blasted as "tax havens" by such groups as the Tax Justice Network, to say nothing of politicians, who resent them for siphoning away economic activity and depriving high-tax nations of "their" precious tax revenues. Recent work by a University of Michigan economist suggests this hostility is misplaced.

James R. Hines, in a National Bureau of Economic Research (NBER) paper co-authored by Mihir Desai and Fritz Foley of Harvard Business School, found that "haven activity does not appear to divert activity from non-havens." In fact, their calculations indicate that "firms establishing tax haven operations expand, rather than contract, their foreign activities in nearby countries." When firms can reduce their tax burden by means of affiliates in tax haven countries, the authors argue, sales and investment in nearby nonhaven nations increase.

But don't the haven countries shortchange their own citizens by offering such favorable conditions for multinational corporations? In another NBER working paper, Hines suggests they don't. During the 1980s and '90s, he notes, real per capita GDP grew faster in haven countries than the world average. And with government sizes averaging 25" percent of GDP, compared to a global average of 20 percent, haven states don't seem to be starved for revenue either.