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Tax havens or safe havens

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  • Pieretti, Patrice
  • Thisse, Jacques-François
  • Zanaj, Skerdilajda

Abstract

Our aim is to explain how a small country can be viable as an international banking center (IBC). We build a model in which mobile investors choose between two banking centers located respectively in a small country and in a large country. These countries compete in two instruments, taxation and institutional infrastructure. It follows that an IBC can be a tax haven, a safe haven, or both. A small country that hosts an IBC is a safe haven when it is able to provide a high level of institutional infrastructure, whereas it chooses to be a tax haven when it cannot be competitive in institutional infrastructure. Even in this last case, an IBC need not be as bad as claimed in the general press because its presence fosters institutional competition across countries, which is ultimately beneficial to all investors.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8570.

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Date of creation: Sep 2011
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Handle: RePEc:cpr:ceprdp:8570

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Keywords: institutional infrastructure competition; international banking centers; portfolio investments; tax competition;

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  1. Dharmapala, Dhammika & Hines Jr., James R., 2009. "Which countries become tax havens?," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1058-1068, October.
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  10. Patrice Pieretti & Skerdilajda Zanaj, 2009. "On tax competition, public goods provision and jurisdictions' size," CREA Discussion Paper Series 09-14, Center for Research in Economic Analysis, University of Luxembourg.
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  13. La Porta, Rafael & Lopez-de-Silanes, Florencio & Schleifer, Andrei & Vishny, Robert, 2001. "Investor Protection and Corporate Governance," Working Paper Series rwp01-017, Harvard University, John F. Kennedy School of Government.
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