The paper "Fiscal Paradise: Foreign Tax Havens and American Business" by James R. Hines Jr. and Eric M. Rice examines the impact of tax havens on US multinational corporations (MNCs) and the implications for US and foreign governments. The authors find that US firms account for a significant portion of their foreign investment and profits through tax haven affiliates, which offer unusually low tax rates. They analyze the incentives that drive US firms to locate operations in these tax havens and the potential revenue implications for the US government. Key findings include: 1. **High Profit Rates in Tax Havens**: US firms report unusually high profit rates in tax havens, suggesting that the tax rate maximizing revenue is around 6%. 2. **Incentives for Tax Havens**: The low tax rates in tax havens attract US firms, as they can shift domestic income to these jurisdictions to reduce tax liability. 3. **Behavior of US Firms**: US firms are highly sensitive to the tax rates in tax havens, with earnings being extremely sensitive to low tax rates. 4. **Government Revenue Implications**: While tax havens may reduce US tax revenue in the short term, they can also enhance the ability of the US government to tax foreign earnings of American companies. 5. **Debt Contracts and Transfer Pricing**: US firms use debt contracts and transfer pricing to adjust their tax burdens and shift taxable income to tax havens. 6. **Factoring Income**: Factoring income, where receivables are sold to finance subsidiaries in tax havens, is another method to defer US taxation. The authors conclude that the widespread use of tax havens poses a challenge to the sustainability of the US domestic tax base but also highlights the potential for the US Treasury to collect more revenue from foreign-source income if tax havens raise their tax rates.The paper "Fiscal Paradise: Foreign Tax Havens and American Business" by James R. Hines Jr. and Eric M. Rice examines the impact of tax havens on US multinational corporations (MNCs) and the implications for US and foreign governments. The authors find that US firms account for a significant portion of their foreign investment and profits through tax haven affiliates, which offer unusually low tax rates. They analyze the incentives that drive US firms to locate operations in these tax havens and the potential revenue implications for the US government. Key findings include: 1. **High Profit Rates in Tax Havens**: US firms report unusually high profit rates in tax havens, suggesting that the tax rate maximizing revenue is around 6%. 2. **Incentives for Tax Havens**: The low tax rates in tax havens attract US firms, as they can shift domestic income to these jurisdictions to reduce tax liability. 3. **Behavior of US Firms**: US firms are highly sensitive to the tax rates in tax havens, with earnings being extremely sensitive to low tax rates. 4. **Government Revenue Implications**: While tax havens may reduce US tax revenue in the short term, they can also enhance the ability of the US government to tax foreign earnings of American companies. 5. **Debt Contracts and Transfer Pricing**: US firms use debt contracts and transfer pricing to adjust their tax burdens and shift taxable income to tax havens. 6. **Factoring Income**: Factoring income, where receivables are sold to finance subsidiaries in tax havens, is another method to defer US taxation. The authors conclude that the widespread use of tax havens poses a challenge to the sustainability of the US domestic tax base but also highlights the potential for the US Treasury to collect more revenue from foreign-source income if tax havens raise their tax rates.