Abstract
In this paper, I examine innovation in the context of an unexpected policy shock that facilitated tax arbitrage by U.S. multinational firms. I find that after the shock, U.S. multinationals shifted more of their intellectual property to low tax countries. The firms' taxable income moved in parallel, increasing the after-tax return to innovative activity. In response, U.S. multinationals increased their innovative activity in the U.S., whether measured using R&D expenditures, R&D employment, patent applications, or patent citations. The findings contrast with U.S. policy makers' concerns that innovation-focused investment and employment are leaving the U.S. due to disparities between the U.S. and foreign tax codes.
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