A journey from a corruption port to a tax haven

We sketch a model according to which tax havens attract corporate income generated in corrupted countries. We consider the choice of optimal bribes by corrupt officials and the share of the proceeds of corruption that will be concealed in tax havens. Our framework provides novel welfare implications of tax havens. First, tax havens’ services have a positive effect on welfare through encouraging investment by firms fearing expropriation and bribes in corrupt countries. Second, by supporting corruption and the concealment of officials’ bribes, tax havens discourage the provision of public goods and hence have also a negative effect on welfare. The net welfare effect depends on the specified preferences and parameters. One source of this ambiguity is that the presence of multinational firms in corrupted countries is positively associated with demanding tax havens’ operations. Using firm-level data, we provide new empirical results supporting this hypothesis.