draining development.pdf - Khazar University

348 Draining Development?3. Tax havens increase the inequitable distribution of tax revenues.4. Tax havens reduce the efficiency of resource allocation in developingcountries.5. Tax havens make economic crime more profitable.6. Tax havens can encourage rent seeking and reduce private incomes indeveloping countries.7. Tax havens damage institutional quality and growth in developingcountries.Of these, 1 relates to systematic global financial risk, 2–4 relate primarilyto the damage done to effective tax systems, 5 relates to the damagedone through crime, and 6 and 7 relate to distortions to economicactivity, including corruption. We treat these in turn and also the majorpositive claim that tax havens can encourage investment in developingcountries.Aside from the systemic stability issue, the Norwegian commission’sbreakdown is in line with the most widely quoted analysis of illicit globalfinancial flows, which suggests that the volume of outflows fromdeveloping countries reaches US$500 billion–US$800 billion a year(Baker 2005; subsequently revised upward by Kar and Cartwright-Smith2008). Of this amount, 60–65 percent is estimated to be associated withcommercial tax evasion (overwhelmingly in the form of mispricing andmisinvoicing in trade both between unrelated parties and within multinationalgroups), 30–35 percent to the laundering of criminal proceeds(for example, drug and human trafficking), and around 3 percent to thecorruption of public officials.The Norwegian commission summarizes these important estimatesand a good deal of additional literature that deals with the general scaleof illicit capital flows. We do not treat this broader literature in moredetail here, but concentrate only on those contributions that specificallyaddress the role of tax havens. The subsections below survey the literatureon the main areas of development impact, considering efforts atquantification and broader arguments about the channels of impact.Systemic financial riskChristian Aid (2008) advances the argument that the financial crisis was,effectively, a capital account liberalization bust, following a classic boom