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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. Gustav Hansson & Ola Olsson, 2006. "Country Size and the Rule of Law: Resuscitating Montesquieu," DEGIT Conference Papers c011_033, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. 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.
  3. Kai A. Konrad, 2007. "Mobile Tax Base as a Global Common," CESifo Working Paper Series 2144, CESifo Group Munich.
  4. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
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  8. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1027-56, November.
  9. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
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  11. James R. Hines, 2010. "Treasure Islands," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 103-26, Fall.
  12. Hindriks, Jean J.G. & Peralta, Susana & Weber, Shlomo, 2007. "Competing in Taxes and Investment under Fiscal Equalization," CEPR Discussion Papers 6431, C.E.P.R. Discussion Papers.
  13. 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.
  14. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February.
  15. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
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