The Market for Tax Havens

Author: Sébastien Laffitte

I investigate the determinants and consequences of the development of tax havens using a novel database that tracks the creation and development of offshore institutions in 48 tax havens. After describing the development of tax havens in the 20th century and several key empirical patterns, I explore their causal determinants. Building on the idea that tax havens are the suppliers in the market for offshore services, I show that demand shocks explain why countries become tax havens. I also find that competition shocks explain why tax havens update their regulations. This reaction is facilitated by the diffusion of legal technologies between tax havens. Finally, I show that becoming a tax haven generates GDP per capita gains and sectoral reallocation in countries adopting this status. In return, the tax structure of non-haven countries is affected by the rise of tax havens, resulting in an increased tax burden on labor relative to capital.