Treasure Islands, Real Jobs? Workers and Anti-Avoidance Policies in a Tax Paradise

What type of employment exists in low-tax jurisdictions? How are employment and individual workers affected by reforms aimed at better aligning profits with real activities? Using a unique employer-employee dataset for Zona Franca da Madeira, a tax paradise on a Portuguese island, we show that workers are highly educated, perform specialized tasks, and benefit from a wage gap, particularly at the top. A reform designed to link profits more closely with real substance resulted in worker exits, while those who remained experienced wage increases and a higher likelihood of working for multiple firms simultaneously. New hires faced more precarious conditions, earning, on average, 30% less than incumbents, often working under temporary contracts. These results offer insights into policies promoting economic substance in low-tax jurisdictions.