The Danger of Tax Havens for Financial Stability

The concerns about tax haven activity shown by leading nations originate not only from a sense of injustice caused by the fact that tax havens allow multi-billion dollar firms such as Google, Starbucks and Apple to pay only a few pennies in taxes but the notion that tax haven activity fuels international financial instability through various avenues. This contribution evaluates the risk of financial collapse or liquidity crisis to tax havens in general. It shows that tax havens are more exposed to the risk of a financial collapse than non-tax havens and that this risk positively depends on the amount of profits shifted to them. We find that the risk of a tax haven collapse is positively related to the corporate tax rate and MNCs are willing to make more daring investments in tax havens the higher corporate tax rates. However, MNCs take the risk of losing their investments due to a financial collapse into account and hence invest only a fraction of their profits in tax havens.