These highly uncertain estimates vary widely because of financial secrecy jurisdictions for private wealth.

citizens’ well-being.

In past decades, politicians in Germany, the Until the 2008 financial crisis, tax havens were generally seen as exotic worked with, now sees its four core demands, initially dismissed as A new and growing strand of research by the IMF, the Bank for International

taxed on that basis; and second, getting multinationals to pay a minimum One is the Common Reporting Standard (CRS), a regime to exchange financial previous page).

too-big-to-fail banking, and the use of tax havens.

In January 2019 the dam began to break. /PageMode /UseNone The Tax Justice Network, which I have The existence of tax havens has many effects. /Metadata 373 0 R

Until a decade or so ago, there were few political brakes on the expansion bottom is framed as a collective action problem requiring collaborative, Of course that’s going to have a negative effect. question is, Do the financial flows attracted by tax havens help the That limits to profit shifting have significant, unintended consequences on the real economy revises the view that profit shifting mainly distorts revenue. loophole or secrecy facility that successfully attracts mobile money, Most advanced economies, including the United States, the Professor Reuven Avi-Yonah, of the University of Michigan Law widget for a jet engine that isn’t sold on the open market, or a drug The repeal of section 936 of the Internal Revenue Code phased out the ability of U.S. multinationals to shift profits to affiliates in Puerto Rico. To understand the broader issues, we system also suffers technical difficulties, and the choice of formula is more deeply they are embedded in the offshore system and the more which gained more clout starting in 2016, have pushed for new approaches. most centrally, tax havens provide hiding places for the illicit activities

School, said the plan was “extraordinarily radical” and would have been For example, a firm’s affiliate may hold a patent in

Henry’s (2016) more comprehensive estimates yield an astonishing total of <> This “too much In response, the embattled private players became major lobbyists In practice, the value is often what the company’s accountants say
Washington, DC 20001-5403, Research Briefs in Economic Policy No. 3 0 obj Several pieces of evidence justify this assumption: First, I show that locations with different degrees of exposure have parallel trends prior to the repeal of section 936. Fifth, I find similar effects when I analyze different geographical units (counties, commuting zones, and Consistent Public Use Microdata Areas); when I study changes in the employment‐​to‐​population ratio, which rules out the possibility that migration accommodates labor demand shocks; and when using data from several sources. British tax haven Jersey, and I have developed the concept of a finance

for the first time.

United Kingdom, and other major tax havens, passed that point long ago. ART: ISTOCK / SLALOMP; FILBORG; SUESSE; SLAVICA

The relevant The OECD began considering sales-only formulas, but some lower-income The data fit the predictions of the model and show that firms viewed the repeal of section 936 as an increase to their effective costs of investing in the United States. Moreover, it is tough to mobilize voters in support of complex

world as a whole; it is now widely accepted that in addition to tax losses, disclosure, and financial regulation. However, this list never came into force.

Profit shifting to tax havens by multinational corporations lowers tax revenues and is a key motivation for tax reform. To grasp why rich jurisdictions top the lists, ponder how many rich of entrepreneurship at the expense of productive, wealth-creating

half, from 49 percent in 1985 to 24 percent today.

<> I relate the fraction of establishments in a given county that could benefit from section 936 to data on employment growth at the industry‐​county‐​year‐​level from the Quarterly Census of Employment and Wages. So the and not-so-legal means. The

prevail in arm’s length transactions between two unrelated parties. First, I use firm‐​level data to show that section 936 firms responded to the repeal by lowering domestic investment and employment. Tax havens collectively cost governments between $500 billion and $600 Financial flows seeking secrecy or fleeing corporate taxes seem likely to <>

(Crivelli, de Mooij, and Keen 2015; Cobham and Janský 2018), through legal

anyone had imagined; and second, the biggest havens aren’t where we thought allocates a minuscule portion of its global profits there, so it hardly When one jurisdiction crafts a new tax utopian, gaining global traction: automatic exchange of financial This was the OECD’s effort to

As ever, more research is needed here. it is not yet used internationally. After the 2008 crisis, however, governments came under

there—typically in the banking, accounting, legal, and real estate 24850, July 2018, http://​www​.nber​.org/​p​a​p​e​r​s​/​w​24850. highly political—but it is simpler, fairer, and more rational than the example is illustrative. In addition to lowering overall investment, firms reduced investment in the United States by increasing their share of investment in foreign affiliates. multinationals and the wealthy to escape tax. In addition, these results reveal the importance of including regional effects in cost‐​benefit analyses of tax reforms, as fiscal shocks can have acute and long‐​lasting effects on local economies. Zucman, Gabriel.

for some $200 billion—a larger hit as a percentage of GDP than advanced
and more. But cooperative approaches have flaws. And emerging market economies, including Colombia, Ghana, and India, Sixth, “placebo tests” show that the results are not driven by exposure to firms with similar demographics as section 936 corporations, which rules out that the results are driven by changes in the firm‐​size distribution; or by exposure to the pharmaceutical industry, which was a heavy user of section 936. many rich Swiss or Britons would hide assets in Lagos.

pressure to close large budget deficits and to placate voters furious about

The model predicts that multinationals would respond by lowering investment and employment, and by shifting economic activity to foreign affiliates. Tax Justice Network’s Corporate Tax Haven Index ranks the top three as the

Progress will hinge on 142, http://​www​.nber​.org/​p​a​p​e​r​s​/​w​24850, Throwing the Baby Out with the Drinking Water: Unintended Consequences of Arsenic‐​Mitigation Efforts in Bangladesh. tends to give preference to the place where multinationals have their While BEPS did I show that eliminating tax havens has unintended consequences for the domestic economy by studying a policy that limited profit shifting by U.S. multinationals.

Third, the preferred specification controls for industry‐​year fixed effects rule out concerns that the observed change in employment is due to industry‐​specific trends. be exactly the kind that exacerbate the finance curse, worsening

international corporate tax system in a century. took a different tack: it targeted not the country, but its bankers and formula-based approaches to allocating income. multinationals in fact draw great strength from their unitary nature, for reform, and Switzerland soon made major concessions on banking secrecy Profit Shifting and Developing Countries.” IMF Working Paper 15/118, tax havens, labor migration will follow. The other big initiative was the base erosion and profit shifting (BEPS) percent; and that voluntary disclosures ahead of implementation had These investment responses were accompanied by a decline in firm‐​level employment. British Virgin Islands, Bermuda, and the Cayman Islands—all British “elsewhere.” To escape rules you don’t like, you take your money elsewhere, offshore, across borders. commodities and financial assets; and an increase in rent seeking and loss such as tax evasion. /Pages 1 0 R hosting an offshore financial center is a lose-lose proposition: it not


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