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Tax havens or safe havens

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  • Patrice Pieretti

    ()
    (CREA, University of Luxembourg)

  • Jacques-François Thisse

    ()
    (CORE, Université catholique de Louvain, CREA, Université du Luxembourg and CEPR)

  • Skerdilajda Zanaj

    ()
    (CREA, University of Luxembourg)

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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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-10.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-10

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

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  1. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2630, C.E.P.R. Discussion Papers.
  2. Hindriks, Jean J.G. & Peralta, Susana & Weber, Shlomo, 2007. "Competing in Taxes and Investment under Fiscal Equalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6431, C.E.P.R. Discussion Papers.
  3. Kai Konrad, 2008. "Mobile tax base as a global common," International Tax and Public Finance, Springer, Springer, vol. 15(4), pages 395-414, August.
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  10. Olsson, Ola & Hansson, Gustav, 2011. "Country size and the rule of law: Resuscitating Montesquieu," European Economic Review, Elsevier, Elsevier, vol. 55(5), pages 613-629, June.
  11. PIERETTI, Patrice & ZANAJ, Skerdilajda, 2009. "On tax competition, public goods provision and jurisdictions’ size," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2009012, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Hindriks, Jean & Myles, Gareth D., 2013. "Intermediate Public Economics," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262018691, December.
  13. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, Elsevier, vol. 21(2), pages 197-202, February.
  14. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, Elsevier, vol. 42(2), pages 277-310, February.
  15. James R. Hines, 2010. "Treasure Islands," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(4), pages 103-26, Fall.
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