VoxEU Column Global governance Taxation

Buckling under pressure: Coordination and the fight against tax havens

The reasons why a country would comply with international standards of transparency in the face of sizeable returns in the tax haven business are unclear. This column highlights fundamental coordination problems in the fight against offshore secrecy regimes and their implications for optimal policies, and explores whether the fight will be successful or not.

Bahamas Leaks, Panama Papers, Lux Leaks, Offshore Leaks, Swiss Leaks and so forth – recently, many data leaks turned the spotlight on tax evasion previously concealed by the opacity of offshore financial centres, which are often also referred to as tax havens. Zucman (2013, 2014) estimates that 8% of the global private financial wealth is held in tax havens and that this reduces global tax revenues by about $200 billion annually.

Various policy initiatives have taken aim at this issue and tried pressuring tax havens into compliance with international standards of transparency, without apparent success. For example, Johannesen (2014) provides evidence that the EU Savings Tax Directive mainly caused transfers of funds to non-participating offshore centres as well as formal ownerships into offshore holding companies. Johannesen and Zucman (2014) estimate also that the Tax Information Exchange Agreements, which were meant to end “the era of banking secrecy” (G20 2009), caused a relocation of deposits to the benefit of the least compliant havens.

Nevertheless, the recent years have witnessed a considerable momentum among many major tax havens towards more fiscal transparency. For instance Switzerland, the country whose bank secrecy was considered to be part of its national identity and which is a key player for the management of offshore wealth, has committed to implementing the automatic exchange of tax information in accordance with the OECD Standard, along with more than 100 other countries and jurisdictions.1 The currently successful, yet incomplete endeavour by the OECD and the G20 to achieve global compliance makes it particularly important to understand the incentives underlying a haven country’s decision as to whether to operate as a tax haven or to comply with international standards of transparency. Elsayyad and Konrad (2012), for example, highlight a “last haven standing effect”. In a very competitive environment it is easy to convince haven countries to give up their tax haven activities. With strong competition between many tax havens, the haven countries’ rents are low. If some haven countries cease the secrecy regime and market power in the haven business increases, the tax havens that remain active earn higher rents. To convince a haven country to become compliant in such an environment is more difficult. So the OECD and the G20 may become victims of their own success – once they have convinced almost all tax havens to become compliant, market power has increased and then it will be very difficult to convince the last few tax havens to become compliant, too.

In a new paper, we study the decision of a haven country, which experiences costly international pressure to become more transparent, and integrate the decisions of many individual investors over whether or not to use this haven country to evade taxation in their home countries, into the game theoretic model (Konrad and Stolper 2016). Our analysis identifies a strategic interaction between a tax haven and its potential investors as well as an interaction among the individual investors.

Complementarities and global games

A haven country must decide whether or not to operate as a tax haven and offer concealment opportunities for foreign tax evaders, which would involve some cost. For instance, a tax haven must sustain the international pressure of being blamed for helping tax cheaters hide their capital income. As the controversy in the last few years between Switzerland and the UBS on the one side and the US on the other has demonstrated, this cost also includes the threats and international legal pressure imposed on the banks of a haven country. However, a tax haven also derives benefits from providing such concealment opportunities. These include the private gains and tax revenues from the financial services sector that engages in concealment services. The benefits are higher if the amount of financial capital that has been brought to this tax haven is larger. Therefore, a haven country is more reluctant to quit its secrecy regime the more investors have deposited their capital in this country.

This trade-off highlights the crucial role of the investors in the fight against tax havens. If they locate large stocks of capital in a particular haven country, this very investment makes the haven country resilient to international pressure. But whether investors trust a haven country to continue its secrecy regime and whether they locate their capital there then depends on their beliefs about other investors’ choices. The decisions of the haven country and of the investors as a group, but also the many decisions of the individual investors, are complements and strategically interdependent. These complementarities generate strategic uncertainty and a multiplicity of equilibria. This multiplicity makes any prediction about the effects of international pressure unclear.

We apply standard tools from the global games literature to address this indeterminacy. We thereby derive a clear outcome prediction as a function of the international political pressure on a haven country, which comes along with several policy implications.

Key findings

A coordination failure among investors may lead to a low inflow of financial capital and can induce a haven country to comply with transparency standards, even though the costs from international pressure may not exceed the potential gains from an active tax haven business. But if all investors believe that a haven country will sustain the international pressure, a tax haven regime with concealment opportunities may prove very profitable and remarkably resilient to external pressure.

Small amounts of investors’ uncertainty about how a haven country can cope with international pressure alter the predictions and remove this multiplicity. A clear threshold level of external pressure can be determined so that a sufficient number of investors place trust in a haven country, and the haven country resists to pressure if and only if the pressure is below this threshold.

The threshold level of pressure has interesting properties and depends on a number of factors. The threshold is higher if the OECD countries coordinate on higher capital income taxes. This hints at an inherent trade-off between harmonising tax rates at high levels and fighting tax havens. Both policy goals are often stated as joint means to face harmful tax competition, but in fact they may be counteracting each other.

A similar argument works for weak punishments for revealed offshore tax evasion. The level of international pressure a haven country can sustain is higher if the costs of repatriating financial assets are low. Many countries grant reduced fines for tax evaders who disclose their offshore wealth and process their corrected tax returns themselves, in order to lower the administrative costs in tax authorities. This soft punishment increases the amount of costly pressure that a haven country can sustain in the equilibrium.

Finally, the outcome prediction gives insights into the relationship between the pricing of concealment services, and a tax haven’s resilience to international pressure. The resilience is not monotonic in the size of financial service fees. If the fees are very low, the haven country earns too little to resist to international pressure. But if the fees are very high, the investors gain too little from the concealment regime and are not compensated for the risk that the haven country may become compliant. The analysis shows that coordination on the continuation of a secrecy regime is ‘most robust’ and haven countries are able to sustain the highest levels of international pressure if the premiums for concealment services are in between both extremes.


Elsayyad, M, and K A Konrad (2012), “Fighting multiple tax havens”, Journal of International Economics, 86 (2), 295–305.

The Group of 20 (G20) (2009), “The global plan for recovery and reform”, Final communique of the G20 Summit held in London, 2 April.

Johannesen, N (2014), “Tax evasion and Swiss bank deposits”, Journal of Public Economics 111, 46–62.

Johannesen, N, and G Zucman (2014), “The end of bank secrecy? An evaluation of the G20 tax haven crackdown”, American Economic Journal, Economic Policy, 6 (1), 65–91.

Konrad, K A, and T B M Stolper (2016), “Coordination and the fight against tax havens”, Journal of International Economics, 103, 96–107.

Zucman, G (2013), “The missing wealth of nations: Are Europe and the U.S. net debtors or creditors?”, Quarterly Journal of Economics, 128 (3), 1321–1364.

Zucman, G (2014), “Taxing across borders: Tracking personal wealth and corporate profits”, Journal of Economic Perspectives, 28 (4), 121–148.


[1] For a list of jurisdictions that have committed to implement the new standard for an automatic exchange of tax information, see

1,995 Reads