William & Mary Law Review


Recently, the issue of tax havens has risen to the fore of the fiscal policy debate, with tax havens being singled out as the root cause of many of the fiscal shortfalls plaguing the governments of the world. Surprisingly, however, although there has been a fair amount of literature on why tax havens are harmful to the modern international tax regime, which countries become tax havens, and what means are available to combat tax havens, there has been less written specifically on the underlying question of why, notwithstanding all these points, tax havens exist in the first place, or why they persist in the face of such overwhelming criticism. This Article will fill that gap by directly confronting the question: why are there tax havens?

To this end, this Article will propose for the first time that the focus of the international tax laws of wealthier countries, such as the United States, on capital neutrality—or making the flow of capital across borders easier and cheaper—can actually create or exacerbate the incentives necessary for poorer countries to act as tax havens. This can be thought of as a “capital neutrality paradox” in that it is the pursuit of capital neutrality—meant to increase worldwide efficiency—which leads to more countries acting as tax havens, effectively undermining worldwide efficiency. Consequently, punishing such countries in response would also prove counterproductive, because it would only exacerbate these incentives created by U.S. law in the first place. This “punishment paradox” in connection with the “capital neutrality paradox” can fundamentally alter the way in which the law should conceptualize and respond to the issue of tax havens. Rather than ask “why are there tax havens?”, the question would become “why pursue capital neutrality?” Rather than ask “what can we do to punish tax havens?”, the question would become “would punishment be effective?” Such an approach could not only lead to a more efficient international tax regime, but could also be the first step to finally answering the question of why there are tax havens.

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