Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens

A tax competition model is presented to investigate the effects of tax havens on the public good provision. We show that when countries facing a rise in tax havens change their tax enforcement strategies in response, the existence of tax havens may result in a higher level of equilibrium public good provision as compared to the case with no tax havens. Accordingly, tax havens could be welfare enhancing for non-haven countries. This result offers a possible explanation for the recent empirical evidence that the corporate tax revenues in high-tax countries have actually increased with the growth in the flow of foreign direct investment to tax havens.