FDI and income inequality in tax-haven countries: The relevance of tax pressure

Abstract

The agenda of the United Nations sustainable development goals (SDGs) for 2030 has shifted attention from poverty to equality. Unlike poverty, which has declined, inequality has not significantly changed in the past twenty years. Hence, in the absence of a strong fiscal context in which profits are redistributed from governments to their local societies, tax havens are likely to cement inequality in place. In this paper, we study the effects of foreign direct investment (FDI) on income inequality in terms of different indicators using a panel data analysis in 46 countries with a low tax burden over the period 2000–2021. Our results confirm that FDI contributes to mitigating income inequality and improving welfare in the countries studied. This process is likely to be more effective in the presence of a supportive tax framework.