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Treasure Islands James R University of Michigan Law School University of Michigan Law School Scholarship Repository Articles Faculty Scholarship 2010 Treasure Islands James R. Hines Jr. University of Michigan Law School, [email protected] Available at: https://repository.law.umich.edu/articles/717 Follow this and additional works at: https://repository.law.umich.edu/articles Part of the Law and Economics Commons, and the Taxation-Transnational Commons Recommended Citation Hines, James R., Jr. "Treasure Islands." J. Econ. Persp. 24, no. 4 (2010): 103-25. This Article is brought to you for free and open access by the Faculty Scholarship at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Articles by an authorized administrator of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. Journal of Economic Perspectives—Volume 24, Number 4—Fall 2010—Pages 103–126 Treasure Islands James R. Hines Jr. n mmoviesovies aandnd nnovels,ovels, ttaxax hhavensavens aarere ooftenften settingssettings forfor shadyshady internationalinternational deals;deals; iinn ppractice,ractice, ttheyhey aarere rratherather llessess fl ashy.ashy. TaxTax havenshavens areare countriescountries andand territoriesterritories I tthathat oofferffer lowlow ttaxax rratesates aandnd ffavorableavorable regulatoryregulatory policiespolicies toto foreignforeign investors.investors. FForor eexample,xample, ttaxax hhavensavens ttypicallyypically ttaxax iinboundnbound investmentinvestment aatt zzeroero oorr vveryery llowow rratesates aandnd ffurtherurther eencouragencourage iinvestmentnvestment wwithith ttelecommunicationselecommunications aandnd ttransportationransportation ffacilities,acilities, ootherther bbusinessusiness iinfrastructure,nfrastructure, ffavorableavorable legallegal eenvironments,nvironments, aandnd llimitedimited bbureaucraticureaucratic hhurdlesurdles ttoo sstartingtarting nnewew fi rms.rms. TaxTax havenshavens areare small:small: mostmost areare islands;islands; aallll bbutut a ffewew hhaveave ppopulationsopulations belowbelow oneone million;million; andand theythey havehave above-averageabove-average iincomes.ncomes. TTaxax hhavensavens aarere aalsolso kknownnown aass ““offshoreoffshore fi nancialnancial centers”centers” oror “international“international fi nnancialancial ccenters,”enters,” pphraseshrases thatthat maymay carrycarry slightlyslightly differingdiffering connotationsconnotations butbut never-never- tthelessheless aarere uusedsed aalmostlmost iinterchangeablynterchangeably wwithith ““taxtax hhavens.”avens.” TThehe defidefi nitionnition ooff exactlyexactly wwhathat makesmakes a taxtax havenhaven maymay dependdepend onon thethe typetype ooff investmentinvestment aandnd requiresrequires a degreedegree ofof judgment,judgment, butbut fortunately,fortunately, thosethose whowho havehave cconsideredonsidered tthehe iissuessue kkeepeep compilingcompiling veryvery similarsimilar lists.lists. ForFor example,example, inin HinesHines andand RRiceice ((1994),1994), mmyy ccoauthoroauthor aandnd I iidentifidentifi eded taxtax havenshavens basedbased onon theirtheir lowlow businessbusiness ttaxax rrates,ates, sself-promotionelf-promotion aass fi nancialnancial centers,centers, andand whetherwhether theythey werewere identifiidentifi eded asas ttaxax hhavensavens bbyy ootherther aauthoritativeuthoritative ssources.ources. OOECDECD ((2000)2000) identifiidentifi eded a similarsimilar listlist ofof ttaxax hhavensavens ((thoughthough oonene tthathat oomitsmits OOECDECD ccountries),ountries), aass ddidid DDiamondiamond aandnd DDiamondiamond ((2002)2002) aandnd thethe UU.S..S. GGovernmentovernment AAccountabilityccountability OffiOffi cece (2008).(2008). TableTable 1 offersoffers a rratherather iinclusivenclusive llistist ooff 5252 countriescountries aandnd tterritorieserritories ccommonlyommonly cconsideredonsidered toto bebe taxtax hhavens.avens. TTakenaken ttogether,ogether, theythey hhaveave a ttotalotal ppopulationopulation ofof aboutabout 5500 mmillionillion aandnd a totaltotal ■ JJamesames R.R. HinesHines Jr.Jr. iiss RRichardichard AA.. MMusgraveusgrave CCollegiateollegiate PProfessorrofessor ofof EconomicsEconomics andand L.L. HartHart WWrightright CCollegiateollegiate PProfessorrofessor ooff LLaw,aw, UUniversityniversity ooff MMichigan,ichigan, AAnnnn AArbor,rbor, MMichigan.ichigan. HHee iiss aalsolso a ResearchResearch AAssociate,ssociate, NationalNational BBureauureau ofof EconomicEconomic Research,Research, Cambridge,Cambridge, Massachusetts.Massachusetts. HisHis ee-mail-mail aaddressddress iiss 〈 [email protected]@umich.edu〉. doi=10.1257/jep.24.4.103 104 Journal of Economic Perspectives Table 1 Tax Havens Andorra Guernsey Nauru Anguilla Hong Kong Netherlands Antilles Antigua and Barbuda Ireland Niue Aruba Isle of Man Panama Bahamas Jersey Samoa Bahrain Jordan San Marino Barbados Lebanon Seychelles Belize Liberia Singapore Bermuda Liechtenstein St. Kitts and Nevis British Virgin Islands Luxembourg St. Lucia Cayman Islands Macao St. Martin Cook Islands Maldives St. Vincent and the Grenadines Costa Rica Malta Switzerland Cyprus Marshall Islands Tonga Djibouti Mauritius Turks and Caicos Islands Dominica Micronesia Vanuatu Gibraltar Monaco Grenada Montserrat Note: See text for the selection method. GGDPDP ooff aaboutbout $$1.11.1 ttrillion—thatrillion—that iis,s, roughlyroughly thethe ssizeize ooff thethe economyeconomy ofof NewNew YorkYork SState.tate. HHowever,owever, tthree-quartershree-quarters ofof tthathat GDPGDP lliesies inin fourfour countries—Hongcountries—Hong Kong,Kong, IIreland,reland, SSingapore,ingapore, aandnd Switzerland—andSwitzerland—and 1616 ooff tthesehese eeconomiesconomies havehave nationalnational GGDPsDPs ooff llessess tthanhan $$22 bbillion.illion. TThehe UUnitednited SStatestates aandnd ootherther hhigher-taxigher-tax ccountriesountries ffrequentlyrequently eexpressxpress cconcernsoncerns ooverver hhowow ttaxax hhavensavens mmayay aaffectffect ttheirheir eeconomies.conomies. FForor eexample,xample, ttaxax hhavensavens mmightight eeroderode ddomesticomestic ttaxax ccollectionsollections bbyy ppermittingermitting iindividualsndividuals ttoo eearnarn iincomencome tthroughhrough aaccountsccounts iinn ttaxax hhavensavens tthathat ttheyhey ddoo nnotot ddiscloseisclose ttoo ttheirheir hhomeome ggovernments,overnments, oorr eelselse bbyy ffacili-acili- ttatingating a ssituationituation iinn wwhichhich bbusinessusiness iincomencome aactuallyctually eearnedarned iinn hhigh-taxigh-tax jjurisdictionsurisdictions iiss rreportedeported fforor ttaxax ppurposesurposes aass hhavingaving bbeeneen eearnedarned eelsewhere.lsewhere. TTaxax hhavensavens ccouldould aattractttract eeconomicconomic aactivityctivity tthathat iiss aarguablyrguably llostost ttoo hhigher-taxigher-tax ccountriesountries wwherehere tthehe aactivityctivity mmightight ootherwisetherwise hhaveave llocated.ocated. SSomeome wworryorry tthathat ccorporateorporate aandnd bbankinganking ssecrecyecrecy oofferedffered bbyy ttaxax hhavensavens ccouldould ffacilitateacilitate ccriminalriminal aactivities,ctivities, iincludingncluding ccrimesrimes bbyy ddictators,ictators, aandnd tterroristerrorist aandnd ddrug-relatedrug-related aactivities.ctivities. CConfionfi ddentialential aaccountsccounts iinn ttaxax hhavensavens mmightight rreduceeduce tthehe ttransparencyransparency ooff fi nnancialancial aaccountsccounts aandnd ttherebyhereby iimpedempede tthehe ssmoothmooth ooperationperation aandnd rregulationegulation ooff llegalegal aandnd fi nnancialancial ssystemsystems aaroundround tthehe wworld.orld. FFinally,inally, ddifferencesifferences bbetweenetween tthehe ppoliciesolicies ooff ttaxax hhavensavens aandnd tthosehose ooff ootherther ccountriesountries mmayay ccontributeontribute ttoo tthehe pproblem,roblem, iiff iitt iiss oone,ne, ooff eexcessivexcessive iinternationalnternational ttaxax ccompetition.ompetition. TThesehese cconcernsoncerns aarere aallll pplausible,lausible, aalbeitlbeit ooftenften ffoundedounded oonn aanecdotalnecdotal rratherather tthanhan ssystematicystematic eevidence.vidence. TTheyhey aarere buttressedbuttressed bbyy a sense,sense, heldheld byby many,many, thatthat therethere isis ssomethingomething ddistastefulistasteful iinn thethe kkindsinds ooff fi nancialnancial ttransactionsransactions forfor whichwhich taxtax havenshavens areare bbestest kknown.nown. YYetet ttaxax hhavenaven ppoliciesolicies mmayay aalsolso benefibenefi t otherother economieseconomies andand eveneven facilitatefacilitate thethe eeffectiveffective ooperationperation ooff tthehe ttaxax ssystemsystems ooff ootherther ccountries.ountries. TTaxax hhavensavens changechange tthehe James R. Hines Jr. 105 nnatureature ooff taxtax ccompetitionompetition aamongmong ootherther countries,countries, veryvery ppossiblyossibly permittingpermitting themthem toto ssustainustain hhighigh ddomesticomestic ttaxax rratesates tthathat aarere eeffectivelyffectively mmitigateditigated fforor mmobileobile iinternationalnternational iinvestorsnvestors wwhosehose ttransactionsransactions aarere rroutedouted tthroughhrough ttaxax hhavens.avens. BByy ddifferentiatingifferentiating ttaxax bburdensurdens iinn tthishis wway,ay, ccountriesountries aarere aableble ttoo mmaintainaintain ssizableizable ddomesticomestic ttaxax bbasesases iinn tthehe ffaceace ooff ggrowingrowing iinternationalnternational ccompetition.ompetition. TThehe fi nancialnancial andand otherother businessbusiness activityactivity ttakingaking pplacelace
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