Working Paper: NBER ID: w5755
Authors: Mihir A. Desai; James R. Hines Jr.
Abstract: This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate credits on income received from foreign corporations owned 50% or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Reform Act of 1986 (TRA) (H20) | increase in tax cost of U.S. participation in joint ventures (H25) |
| increase in tax cost of U.S. participation in joint ventures (H25) | decline in U.S. joint venture activity (L24) |
| Tax Reform Act of 1986 (TRA) (H20) | higher debt-asset ratios in joint ventures (G32) |
| Tax Reform Act of 1986 (TRA) (H20) | increased royalty payments to U.S. parents in joint ventures (L24) |
| decline in U.S. joint venture activity (L24) | Tax Reform Act of 1986 (TRA) (H20) |