Tuesday, January 17, 2012
Hanlon Presents Offshore Investments in U.S. Equity and Debt Markets and U.S. Tax Evasion Today at NYU
Michelle Hanlon (MIT Sloan School of Management) presents "Taking the Long Way Home: Offshore Investments in U.S. Equity and Debt Markets and U.S. Tax Evasion" at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU):
We empirically examine a form of offshore tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. equity and debt securities. While their true nature is hidden from the authorities, such investments are reflected in foreign portfolio investment data routinely gathered by the Federal Reserve. We identify the tax evasion component in these data by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. We find that foreign portfolio investment from tax haven countries is increasing in the U.S. tax rate, which reflects the incentive to evade, and decreasing in detection and enforcement efforts, our proxy for the expected risk of being caught. Both of these results are consistent with a portion of portfolio investment from haven countries being made by U.S. tax evaders and not from “true” foreign investors. To our knowledge, this is the first empirical evidence of investor-level tax evasion affecting cross-border investment in equity and debt markets. In addition, our results suggest that estimates of home bias may themselves be biased.