Why would a country ever comply with international standards of transparency despite the sizeable returns in the tax haven business? In a recent publication, Kai A. Konrad and Tim Stolper highlight fundamental coordination problems in the fight against tax havens and what this implies for whether the fight will be successful or not.

A country’s decision as to whether or not to operate as a tax haven depends on the decisions of many single investors. Each investor’s decision, however, depends on the anticipated decision of the haven country and the decisions of the other investors. The haven country will trade-off costs—e.g. arising from international political pressure—and benefits such as financial sector profits, which create tax revenues, jobs and other economic spillovers and are proportional to the amount of capital attracted by being a tax haven. Each individual investor, when deciding whether or not to use this haven country to conceal capital and evade taxation, assesses how likely it is that the country will provide a secrecy regime, which also depends on how many other investors deposit their capital there. This feedback loop creates a coordination problem among many players. A coordination failure can induce compliance, although the costs from international pressure may not exceed the potential gains from the tax haven business.

The analysis offers a possible explanation for recent concessions by some haven countries as well as the large profits for those countries that persist as tax havens. Furthermore, it connects previously unrelated policy issues – the fight against tax havens and the level of taxation as well as the degree of punishment for revealed tax evaders.

Veröffentlichung:   Journal of International Economics, 2016, 103, S. 96-107.