Do Tax Havens Really Flourish? Accounting for Endogeneity in Growth Regressions

That tax haven policies contribute to favorable economic growth in tax haven countries is commonly accepted. There is, however, minimal empirical evidence to substantiate this assertation and empirical investigations are subject to endogeneity bias. 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 support for the claim that tax havens “flourish” compared with non-tax haven countries. The sensitivity of the estimates to the treatment 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. 09/16/2011 * Corresponding Author JEL classification codes: H25, H87