draining development.pdf - Khazar University

Tax Havens and Illicit Flows 357taining foreign investment at levels exceeding those that would persist iftax havens were more costly” (Desai, Foley, and Hines 2006a, 223).The model is dismissed by the Norwegian commission. The model isbased on “the assumption that an investor can make real investmentswith a real level of activity in a tax haven,” the commission states on page72 of its report. 17 “In fact, foreigners who use the preferential tax regimeare not permitted to invest locally, have local employees or use the country’scurrency. The Commission accordingly takes the view that theassumption underlying the analysis is based on ignorance of investorregulations in tax havens.”The empirical results can be criticized because they are based on a limitedsample of U.S. multinationals and therefore, as indicated above, maynot capture the main benefits claimed. Certainly, the results are insufficientto support the claims made for the benefits of tax havens. As with theclaims about damage discussed above, they require closer scrutiny.Further research should assess more carefully whether any causalrelationship can be established between haven origin investment and(1) the total level of inward investment and (2) the total level of investmentfrom any source (because round-tripping may lead to artificiallyinflated declarations of inward investment with no necessary associatedincrease in actual investment levels). Additional research should alsoexamine whether investment received through havens has different economicand political impacts relative to other investment flows.Economic and Financial LinksThere are three main issues in the emerging research agenda on the linksbetween havens and development: first, that assessments of the extent ofthese links are lacking; second, that empirical verification is needed ofthe key claims surveyed above about the impact of these links; and, third,that little work has been done to analyze whether different developingcountries are affected differently, which seems to be a key issue, not leastfor policy makers, in prioritizing responses. This section lays out someevidence relating to the first issue, the extent of the links, and highlightsadditional sources that can be tapped for future research. The data presentedwill also form the basis for econometric analysis to address thesecond issue, the extent of the development impact of the links.