Effective Tax Rates for Multinational and Domestic Corporations: A Closer Examination

Abstract

This study investigates the differences in effective tax rates between U.S. multinational corporations and U.S. domestic corporations during the past 30 years. In a recent article published in the Journal of Financial Economics, Dyreng et al. (2017) found that cash effective tax rates for U.S. multinational and U.S. domestic corporations have been declining since 1988. The authors also found that multinational corporations show a higher cash effective tax rate when compared to domestic corporations. Using federal and state effective tax rates, I first examine the difference between these tax rates for multinational and domestic corporations. I find mixed results for federal ETRs, but multinationals achieve a lower state ETR than domestic corporations. I test for the effects that the I.R.C. Section 199 deduction has on these two entities and find that multinationals benefit more than domestic corporations. Next, I test for the effect that intangible assets have on effective tax rates and find that multinationals benefit more than domestic corporations. I examine the effect that decreases in IRS funding have on corporate effective tax rates, and the results are mixed. I investigate the role that spending on tax fees for audits has on effective tax rates and find there is no significant relationship. I test for the impact that the exercise of stock options has on effective tax rates and find that multinationals benefit more from these events. Finally, I test the relationship between firm size and effective tax rates and find mixed results depending upon a linear or nonlinear relationship between these two variables. These findings contribute to the understanding of effective tax rates for U.S. multinational and domestic corporations.