Honor among tax havens

A simple, partial equilibrium model of the supply of offshore tax havens is analyzed, when multinationals are capable of sheltering some of their worldwide income. This model provides a few contrasting predictions to those in “Tax Competition with Parasitic Tax Havens” by Slemrod and Wilson. Slemrod and Wilson model tax sheltering as a production process which uses up scarce resources in the tax haven providing it. Here, multinational firms can transfer some of their income costlessly to an offshore tax haven, which charges a fee for this privilege. (So there are no real resource costs to tax sheltering activity in this model.) But the tax havens must commit credibly to honor their implicit promise to keep tax rates low. The cost of sheltering income, the number of tax havens, and the extent to which multinational firms shelter income there are all determined by this credibility requirement. Although the tax rates in the rest of the world (the larger countries which are not tax havens) will affect the number of tax havens, they will have little or no effect on the amount of income which multinationals choose to shelter.