Endogenous Tax Policy and Economic Growth of Tax Havens

That tax haven policies contribute to favorable economic growth in tax haven countries is widely accepted in international policy dialogues. There is, however, minimal empirical evidence to substantiate this assertion. Empirical investigations are hampered by the likely endogeneity of tax haven policies to underlying growth outcomes. Using a sample of 155 countries from 1982 to 2003, we find that the standard tax haven variable is endogenous to the error term in a typical growth regression. We offer land area measures as valid instruments for tax haven status. Results based on two-stage least squares estimation with heteroskedastic standard errors and controls for initial conditions provide empirical justification for the commonly held belief that tax havens flourish compared with non-tax haven countries. Understanding the role of endogeneity is salient for a variety of related research, including the current dialogue concerning the impact of tax haven policies on non-tax haven countries