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Tax havens or safe havens

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  • Thisse, Jacques-François
  • Pieretti, Patrice
  • 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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  • Thisse, Jacques-François & Pieretti, Patrice & Zanaj, Skerdilajda, 2011. "Tax havens or safe havens," CEPR Discussion Papers 8570, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8570
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    Cited by:

    1. Bucovetsky, S., 2014. "Honor among tax havens," Journal of Public Economics, Elsevier, vol. 110(C), pages 74-81.

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    More about this item

    Keywords

    International banking centers; Portfolio investments; Institutional infrastructure competition; Tax competition;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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