Governance, Trust and Taxes: On the Determinants of Tax Havens

This paper examines the role of social capital (trust) vis-à-vis the propensity of a country to be a tax haven. The empirical analysis corroborates that better governed countries have a higher ceteris paribus
probability to be tax havens. However, social capital counteracts the effect of governance quality. This effect is so strong that the partial effect of governance quality is reversed for countries with the trust
index in the top quartile – making these high trust countries less likely to be tax havens – even as governance quality is increased. Thus it is crucial to consider the interaction between institutions and social capital, since the same governance institutions have a different impact on the tax haven propensity for countries with different social capital.