Corporate tax cuts and firm employment: A match made in haven?

Abstract

Evidence on employment responses to corporate income taxes is mixed. This paper revisits the issue in the context of corporate tax avoidance. It is now well known that multinational companies artificially register some of their profits in tax havens to reduce their tax liability. The study reveals that all other things being equal, the establishment of tax haven subsidiaries is followed by a 4 percent rise in firm employment in the subsequent years. This finding offers greater insight into how corporate income taxes affect employment levels. It also has particular resonance at a time when international tax regulation is tightening to limit the aggressive tax planning activities of large multinational companies. • The paper studies the effect of profit shifting on firm employment. • It exploits data on US-listed firms' financial statements and subsidiaries. • Entry into tax havens is associated with employment growth. • The finding fuels current discussions on the fight against income shifting practices.