ABSTRACT
This chapter discusses a simple analytical model of costly tax evasion to evaluate the effects of taxes on: interest income from the volume of financial intermediation in offshore centres; the interest rate differential between offshore and domestic markets; and the total tax revenue that can be collected from interest income. The simple linear structure of the model yields analytical solutions for the revenue the domestic government can obtain from the taxation of interest income. The model can be used to analyze tax competition between the domestic government and the authorities of the offshore centre. Although Eurobonds are withholding tax free, domestic residents are required to declare the interest they earn on these bonds, which is then taxed as ordinary income. The crucial element of the model is that the costs that arise in connection with tax evasion through investment in Eurobonds are assumed to differ across households.
