Taking the Long Way Home: U.S. Tax Evasion and Offshore Investments in U.S. Equity and Debt Markets

We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S....

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Bibliographic Details
Published in:The Journal of finance (New York) 2015-02, Vol.70 (1), p.257-287
Main Authors: HANLON, MICHELLE, MAYDEW, EDWARD L., THORNOCK, JACOB R.
Format: Article
Language:English
Subjects:
Crime
Debt management
Economic theory
Funds
International finance
Portfolio investments
Portfolio performance
Securities markets
Studies
Tax evasion
Tax incentives
U.S.A
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Summary:We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker's (1968) economic theory of crime, we identify the tax evasion component by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investorlevel tax evasion affecting cross-border equity and debt investment.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12120