The economics of tax havens

The economics of tax havens


  1. According to another recent paper, “The missing profits of nations”, by Ludvig Wier and others, about 40% of the profits earned by multinationals each year continue to be shifted to tax havens.

Important facts:

  1. Organisations like Oxfam have often characterized tax havens as “anti-poor” since they help the rich avoid paying taxes to governments.
  2. Tax havens help rich corporations and businessmen avoid paying high taxes on their income.
  3. It promotes illegal accumulation of wealth.
  4. However, a 2018 paper by Juan Carlos Suarez Serrato, titled “Unintended consequences of eliminating tax havens”, circulated by the National Bureau of Economic Research, emphasized that critics may be committing a huge mistake by attacking tax havens.
  5. The paper tries to point out that if eliminating tax havens is good economic policy.
  6. For this, the author studies the economic impact of repealing Section 936 of the Internal Revenue Code. This made it harder for American multinational corporations to avoid paying taxes.
  7. Corporations had earlier made use of Section 936 to avoid paying high taxes in the U.S. by shifting their profits to tax havens like Puerto Rico that charged them lower tax rates.
  8. The existence of tax havens allowed corporations to invest in the U.S. despite the country’s high tax rates because tax havens helped to lower the effective U.S. tax rate.
  9. Despite the crackdown on tax havens, the practice of shifting profits to avoid paying higher taxes continues unabated.
  10. The author argued the following reasons for profit shifting to other countries:
  • Because tax authorities in high-tax countries have been unable to eliminate the influence of tax havens that compete against them for revenues.
  • So these tax authorities have instead resorted to competing against other high-tax countries by allowing corporations to shift profits to their jurisdictions.
  • Such competition between tax authorities has caused the average global corporate tax rate to fall by more than half between 1985 and 2018.
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