FISCAL PARADISE - FOREIGN TAX HAVENS AND AMERICAN BUSINESS

The tax haven affiliates of American corporations account for more than 20 percent of U.S. foreign direct investment, and nearly a third of the foreign profits of U.S. firms. American companies report extraordinarily high profit rates on their tax haven investments in 1982. This behavior implies that the revenue-maximizing tax rate for a typical haven is around 5-8 percent. American (and foreign) investment in tax havens has an uncertain effect on U.S. tax revenue, but since low tax rates encourage American companies to shift profits out of high-tax foreign countries, it is possible that low foreign tax rates ultimately enhance U.S. tax collections.