Working Paper: NBER ID: w24850
Authors: Juan Carlos Suarez Serrato
Abstract: Eliminating firms' access to tax havens can have unintended consequences for their domestic economic activity. We study a policy that limited profit shifting by US multinationals and show it raised the tax cost of domestic investment. Firms affected by the policy responded by reducing investment and domestic employment. Firm-level responses were amplified to local labor markets through the establishment networks of profit-shifting firms. More exposed local labor markets experienced declines in employment, income, and home values and saw increases in government transfers. Policy proposals that limit profit shifting should therefore consider effects on economic activity in addition to tax revenue.
Keywords: Tax Havens; Profit Shifting; Domestic Investment; Employment; Tax Policy
JEL Codes: F23; H25; H26; H32; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| repeal of section 936 (H26) | effective tax rate of exposed multinationals (H26) |
| effective tax rate of exposed multinationals (H26) | domestic investment (E22) |
| effective tax rate of exposed multinationals (H26) | domestic employment (J63) |
| exposure to repeal (Y60) | employment growth in local labor markets (J69) |
| exposure to repeal (Y60) | income in local labor markets (J31) |
| exposure to repeal (Y60) | wages in local labor markets (J31) |
| exposure to repeal (Y60) | home values in local labor markets (J49) |
| exposure to repeal (Y60) | reliance on government transfers (H53) |