Policy Effects of International Taxation on Firm Dynamics and Capital Structure

Spencer, Adam Hal

Abstract

This article develops a quantitative open economy framework with dynamics, firm heterogeneity and financial frictions to study the impact of corporate tax reforms targeted at multinationals. The model quantifies their impact on firm selection, production and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into selling abroad, through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax as in the Tax Cuts and Jobs Act. The reform's impact trades-off two selection effects - more offshoring versus greater U.S. business dynamism. The reform leads to higher U.S. welfare at little cost to the Treasury. A series of exercises illustrate that the novel features of this framework have significant quantitative implications. The reform gives starkly different cross-sectional predictions and lower welfare gains when financial frictions are removed and it is welfare reducing in a static counterpart of the model.

• Journal Article Type: Article
• Acceptance Date: Aug 1, 2021
• Online Publication Date: Oct 13, 2021
• Publication Date: 2022-07
• Deposit Date: Nov 10, 2020
• Publicly Available Date: Oct 14, 2023
• Journal: Review of Economic Studies
• Print ISSN: 0034-6527
• Electronic ISSN: 1467-937X
• Peer Reviewed: Peer Reviewed
• Volume: 89
• Issue: 4
• Pages: 2149-2200
• DOI: https://doi.org/10.1093/restud/rdab071
• Keywords: Dynamics; Financial Frictions; Productivity; Corporate Tax; Firm Het- erogeneity; FDI; Repatriation Tax
• Public URL: https://nottingham-repository.worktribe.com/output/5032988
• Publisher URL: https://academic.oup.com/restud/advance-article/doi/10.1093/restud/rdab071/6395374?login=true
• Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Economic Studies following peer review. The version of record Adam Hal Spencer, Policy Effects of International Taxation on Firm Dynamics and Capital Structure, The Review of Economic Studies, 2021 is available online at: https://doi.org/10.1093/restud/rdab071