The impact of tax havens on the global economy: the role of the major non-haven economies

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Over the past few years, there has been a growing recognition regarding the perverse impacts of tax havens on the global economy, with scandals like Panama Papers and Pandora Papers. Notwithstanding, “there is no consensus as to what it means” (Chavagneux et al., 2010: 17). In a wider sense, tax havens can be understood through what Ogle (2017) calls an “archipelago capitalism”: a legal constellation consisting of tax havens, offshore financial centers, flags of convenience registries and special economic zones, marked by “certain elements of free-market capitalism” (Ogle, 2017: 1434), such as “low or nil tax regimes and light regulation and government oversight” (ibidem), in a global economy dominated by the political and economic organization of the nation-states.

Despite the lack of unanimity in the literature about the definition of tax havens, one can find some particular elements which help to portray them: there is a place which allows non-resident individuals and corporations to register and maintain assets, by paying low or no taxes, with eased registration procedures and bank secrecy laws (Ogle, 2017; Chavagneux et al., 2010; Dharmapala, 2008).

According to the PwC Tax Guide 2020, there are currently 81 tax havens. Under the veil of capital mobility and international tax competition, those sites have a huge impact on the global economy, in particular by enabling corporate tax avoidance and thus eroding the tax systems of non-haven countries, which in turn has huge impacts on the maintenance of their welfare state. Moreover, this raises the question of wealth inequalities, once those places allow individuals and corporations to avoid taxes in their home countries.

Taking into consideration everything that has been mentioned above, we argue that tax havens have always had, directly or indirectly, the backing of major non-haven economies. This backing can be traced to the creation of the legislative foundations upon which the modern tax havens are built on; their (direct and/or indirect) support of the proliferation of tax havens through their economic actions, which created demand for its services; and their passivity over the international multilateral fight against tax havens.

In first place, “the legal premises on which modern tax havens later developed are: laws in Delaware and New Jersey on quick registration companies, the UK laws related to tax residency, and the Swiss law that establishes the banking secrecy” (Buzan, 2011 in Mara, 2015: 1639). In other words, there are some characteristics of the modern tax havens that appeared decades before, brought about by western countries’ legislation.

The first episode occurred in New Jersey and Delaware, during a time of US restrictive legislation regarding the registration of firms. Around the 1880s, the governor of New Jersey attracted corporations to his state by making it easier for company registrations (Mara, 2015: 1639). This technique was then followed by Switzerland, in Europe.

In 1934, Switzerland introduced legislation about bank secrecy, another characteristic of the modern tax havens (Mara, 2015: 1639). This situation, allied to the fact that Switzerland was a neutral country during the II World War, attracted capital from wealthy individuals and corporations during the world conflict – a time where uncertainty and instability were the watchwords and where the warring countries were raising their taxes in order to deal with the increase of war costs.

After 1945, a major part of tax havens could be found in the former British Empire, due to the lower taxes in the colonies, compared to the ones in the metropole. With decolonization, there was an interest in keeping those low-tax jurisdictions on those places, in a time where the post-war nation-states were raising taxes to finance the reconstruction efforts and the creation of the embryonic welfare state (Ogle, 2017: 1438).

This situation takes us to discuss the collective responsibility of those countries in laying the legislative ground upon which the modern tax havens are built on.

In the second place, following the argument of Dharmapala (2008: 16), “On the whole, it appears more reasonable to believe that the world’s major economies benefit from the existence of tax havens”, one can argue that some non-haven countries have used tax havens as a way to promote the development of their own economic and financial system – “As the existing Bretton Woods system came under pressure from offshore practices, states grew more willing to assist the development of finance and tax havens as a way to support their own financial industries in a climate of increased international competition” (Ogle, 2017: 1451). There was a growing recognition amongst government officials that the growing activity of tax havens would further translate into more business activity, in such a way that “Private actors found ways to connect their interest in tax avoidance with government interest in economic development” (Ogle, 2017: 1444).

As acknowledged by Ogle (2017: 1446), “By the 1960s, the proliferation of tax havens provided a basis for a growing volume of Euromarket business. Such activities were conducted through tax havens to avoid regulations as well as taxes”. Moreover, “the European public sector was a frequent borrower in offshore markets” (Ogle, 2017: 1449), thus creating demand for this type of service, which clearly sent a message that encouraged corporations and multinationals to do the same.

In this way, the non-haven major economies had a role in the proliferation of tax havens – “Between 1945 and 1970, some of the most important new or improved tax havens and offshore markets were set up, and older ones expanded, with government involvement from London and Washington, D.C.” (Ogle, 2017: 1439).

It is generally assumed that the existence of tax havens brings negative consequences to higher-tax countries, in particular through the erosion of the tax systems of the latter, under the umbrella of the increasing international capital mobility and tax competition. In this regard, one should highlight that the negative consequences have a tendency to be harder on the developing countries, whose tax systems are much more fragile compared to the developed countries – “Whilst the tax avoidance industry is clearly damaging to the interests of developed countries, it is almost certain that harmful tax practices are even a greater problem for economies in the developing world” (Christensen, 2003: 3). Those twofold impacts can explain why the backing for this type of jurisdiction happens mainly by the major non-haven economies.

This discussion may appear to be at odds with the increasing initiatives of the OECD and the EU against tax havens. The beginning of the multilateral combat of tax havens dated back to the 1998 OECD Report ‘Harmful Tax Competition’, which resulted in the introduction of tax information exchange agreements amongst tax authorities of different countries. After this initiative, many others followed, tackling mainly the bank secrecy, the profit shifting from corporations, and the exposing of tax haven jurisdictions that “encourage abusive tax practices, which erode member states corporate tax revenues” (EU, 2020) and for that reason do not want to commit to reform itself.

This may seem paradoxical to our initial argument because the major non-haven economies are member-states of those international organizations. This is why, from our point of view, the international fight against tax havens remains rather ineffective – for this reason, one can find the important effect of lobbying in their favor, and because several tax haven jurisdictions are territories dependent on the major non-haven economies.

First of all, one can find that some non-haven economies, which include EU member states as well, do lobbying in favor of tax havens, as argued by Hauck (2019: 538): “The reason for this seemingly ineffective behavior can be found in offshore lobbying conducted either by politically or historically linked EU member states or by the respective tax haven themselves. For example, several British Overseas Territories hired public relations companies or approached politically relevant representatives to make their cases both in London and Brussels”.

Secondly, the fact stressed above is intrinsically related to the fact that some tax havens are territories dependent on those major non-haven economies, namely: the Channel Islands and the Isle of Man for the United Kingdom, Porto Rico and the US Virgin Islands for the United States of America, Hong Kong for China, amongst several others. In the specific case of the British dependencies, they “normally required approval from London in order to pass tax haven legislation” (Ogle, 2017: 1439).

Consequently, those major non-haven economies are, in a way, collectively responsible for the existence of those tax haven jurisdictions, and that fact itself shows that the fight against tax havens can only be multilateral effectively if there is a common ground and a commitment between all the countries involved to change the current status quo.

All things considered, the problem remains unresolved. Tax havens continue to expand – “in mid-1970s there were about 25 tax haven jurisdictions” (Christensen, 2003: 2); today, according to the PwC Tax Guide 2020, there are 81 tax havens.

To sum up, the major non-haven economies have a collective responsibility concerning its existence today – by creating the conditions in which tax havens can flourish: from the legislation ground upon the modern tax havens are built on, their economic actions on the activities of tax havens (direct and indirectly), and their passivity over the international fight against the existence of tax havens. The paradigm can only be changed by a truly multilateral coordinated action of the main non-haven economies.

Their actions described above have undermined the international fight against tax havens, led by international organizations, such as the OECD and the EU. Although this international coordination might be vital, it is clear that nowadays the fight against tax havens is indeed much more difficult, especially due to the technological developments which have been translated into more sophisticated financial instruments (Mara, 2015: 1645), the increase in international capital flows, and the multinationals actions: “despite the various measures used in the fight against tax havens, there is scope for international profit shifting by multinational firms” (Hauck, 2019: 553)

There has been a growing public recognition of the damaging consequences of the activities of tax havens in nation-states tax revenues, diverting capital from the real economy, which have undermined the capacity of nation-states in maintaining the costs of their welfare state, thus having impacts on the economic and social cohesion.

This leads to the discussion of the uneven distribution of wealth, once there is a rise in the tax burden for the common citizen who does not use tax havens. Moreover, in the public eye, there is a growing awareness about the use of tax havens for illegal/immoral activities “taking into account the history of economic crimes involving financial havens and the accusations of them eroding other countries tax base” (Mara, 2015: 1639). In this way, the growing awareness of the negative impacts of tax havens might lead to a greater public outcry and hence political and social instability.

Dionísio Alexandre Andrade
Licenciado em Ciência Política e Relações Internacionais
Mestre em Economia e Políticas Públicas


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Christensen, J. (2003). Tax Distortions, Fiscal Dumping and Tax Fraud.

Dharmapala, D. (2008). What problems and opportunities are created by tax havens?. Oxford Review of Economic Policy, 24(4), 661-679.

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OECD (2008). Harmful Tax Competition: An Emerging Global Issue. Available in:

Ogle, V. (2017). Archipelago capitalism: Tax havens, offshore money, and the state, 1950s–1970s. The American Historical Review, 122(5), 1431-1458.

PwC (2020). Tax Guide 2020. Available in: 2020/tax-havens.html