Study Finds Policies Lowering Foreign Taxes of U.S. Multinational Corporations Unlikely to Benefit Domestic Workers

Recent Study Finds Lowering Foreign Taxes of U.S. Multinational Corporations Unlikely to Benefit Domestic Workers

A recent academic study has shed light on the impact of policies aimed at lowering the foreign taxes of U.S.-based multinational corporations. The study, conducted by researchers from the Wharton School of the University of Pennsylvania, Grinnell College, and Stanford University, found that these policies are unlikely to benefit domestic workers.

The study focused on two key provisions: the 1997 “Check-the-Box” regulations and the 2004 “repatriation holiday.” The Check-the-Box regulations facilitated profit shifting from high-tax foreign affiliates to tax havens, while the repatriation holiday reduced the tax costs of repatriating foreign earnings for multinationals.

Using a dynamic “difference-in-differences” framework, the researchers found that local exposure to Check-the-Box significantly reduced domestic employment and earnings. This suggests that multinational companies may be substituting domestic activity with foreign activity in response to lower effective tax rates abroad.

In contrast, the researchers found that the repatriation holiday had no effects on labor markets, indicating that foreign cash holdings of U.S.-based multinational corporations are not a significant source of financing for domestic business activity.

The study also highlighted the importance of implementing policies that encourage firms to hire more workers. For example, bonus depreciation in the early and late 2000s was found to be effective in leading firms to hire more workers to use the machines they were buying with the bonus depreciation.

Overall, the researchers concluded that lowering the foreign effective tax rate on firms is unlikely to result in increased hiring of domestic workers. Instead, they suggest that policies such as a global minimum tax on multinational corporations may be more effective in supporting domestic workers by keeping the gap between foreign and domestic taxes relatively smaller.