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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. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
  2. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
  3. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
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  5. James R. Hines, 2010. "Treasure Islands," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 103-26, Fall.
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  7. Justman, Moshe & Thisse, Jacques-François & van Ypersele, Tanguy, 2001. "Taking the Bite Out of Fiscal Competition," CEPR Discussion Papers 3109, C.E.P.R. Discussion Papers.
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  10. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
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  12. Hindriks, Jean & Peralta, Susana & Weber, Shlomo, 2008. "Competing in taxes and investment under fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2392-2402, December.
  13. Hampton, Mark P. & Christensen, John, 2002. "Offshore Pariahs? Small Island Economies, Tax Havens, and the Re-configuration of Global Finance," World Development, Elsevier, vol. 30(9), pages 1657-1673, September.
  14. Jean Hindriks & Gareth D. Myles, 2006. "Intermediate Public Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262083442.
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