The Evolution of a Corporate Tax Haven

The central question of my dissertation is under which conditions a tax haven emerges, persists, and disappears again. To assess this, I have examined Dutch corporate tax policy and, to a lesser extent, Danish corporate tax policy. Empirically, I conclude that a tax haven emerges when four sequential conditions are met. A country must i) have the right structural determinants, ii) be presented with an opportunity to become a tax haven, iii) respond quickly to this opportunity by leveraging favourable institutional legacies, and iv) have policymakers who recognise and exploit both the institutional advantages and the open window of opportunity. In proposing this model, I combine insights from structural theories, partisanship, constructivist political economy (CPE) and historical institutionalism (HI). First, I utilise the insights of the structural literature, which shows that it is important for countries to have the right structural determinants in order to conduct aggressive corporate tax policy. These determinants include, among others, the size of an economy, the education level of the labour force, and the quality of its governance. Second, I argue that in order to become a tax haven, a country needs an opportunity to become one. This opportunity often comes from the international context; a large tax reform in another country or the conclusion of bi- or multilateral trade and tax treaties might provide such opportunities. The third step utilises the insights of HI. Many countries compete for corporate taxes and windows of opportunities to become a tax haven can close quickly, this entails that states that have favourable institutional legacies have a significant advantage in engaging in corporate tax competition. Such institutional legacies may involve legal instruments that are already instituted prior to the window of opportunity opening. Often, this means that these instruments do not invite a lot of parliamentary scrutiny and can be utilised quickly, which aids tax havenry. The fourth step utilises the insights of partisanship and constructivist political economy. It argues that states with favourable institutional legacies need policymakers that are receptive to both these institutional advantages and exploiting the window of opportunity. Step two and three of this model highlight the importance of two factors that are often overlooked in the current academic literature. The second step shows that for a small state operating in a global domain, radical change often comes from the international context and the US in particular. The US is the global tax hegemon because of its size and economic importance and the size and significance of its corporations. Furthermore, the EU is internally fragmented on tax matters, and some member states (such as Luxembourg, Ireland, and the Netherlands) benefit from tax avoidance by (American) multinationals. Therefore, a change in US tax policies, a major American tax reform or a changed US attitude on matters of international tax competition and cooperation can significantly alter the policy room for corporate tax havenry by small European states. Step three highlights the importance of historical institutionalism and the effect of entrenched historical institutions on current tax policy. Change in established welfare states moves slowly as countries have to negotiate change through existing institutional structures However, when competing with the entire world for capital and there is a (sudden) increase in the demand for tax haven services, countries need to act quickly to attract the capital in question. Because the speed of policy responses matters, institutional legacies can pose a significant advantage or disadvantage for tax competition and this is why HI deserves to be given a more prominent place in current political economy scholarship on tax competition.