draining development.pdf - Khazar University

Tax Havens and Illicit Flows 347ity, especially in the presence of significant agglomeration benefits infinancial services, is inevitably challenging.In the penultimate section of this chapter, we use the existing listapproach to identify links between developing countries and secrecy jurisdictions.However, we believe the FSI has the potential to provide valuablenew insights on the issue of links, and the relevant research is under way.Econometric analysis of the differential impact of commercial and financiallinks with more or less extreme secrecy jurisdictions may offer muchmore powerful and illuminating results, and we explore some suggestionshere. Additionally, an anonymous referee has suggested the value of creatingsub-FSI indexes that reflect the relative importance of jurisdictions inspecific types of financial services, which would allow analysis of the benefitsor damage attributable at this more granular level. Data constraintsare a major obstacle, but such an analysis, if possible, would be revealing.The terms tax haven and secrecy jurisdiction are used interchangeablyhereafter.Development ImpactBefore assessing the extent of the links between development and secrecyjurisdictions, we survey the literature on the potential developmentimpact. Our intention is to establish the key relationships that requireempirical testing.The literature is unfortunately somewhat limited; it has two generalcharacteristics: a focus on developed-country impact, accompanied bythe study of havens, and a general neglect of tax as a development policyissue (see Cobham 2005a on the latter). A recent assessment by an expertcommission reporting to the Norwegian government represents a usefulstep forward in outlining the key claims and much of the existing evidence.11 Seven major claims are considered, the first three of which (atleast) will affect all countries, while the other four may be especially relevantto developing countries:1. Tax havens increase the risk premium in international financialmarkets.2. Tax havens undermine the functioning of the tax system and publicfinances.