Abstract
The relation between U.S. and foreign tax rates and levels of long-term debt for U.S. multinational corporations is examined in this paper. A simple model demonstrates that the tax benefit of interest deductions depends on the ratio of the foreign tax rate to the U.S. rate, and based on this model, U.S. multinationals with high foreign tax rates are predicted to have low debt levels. Results of empirical tests are consistent with this prediction. U.S. multinational firms with foreign tax rates that are higher than U.S. tax rates have significantly less long-term debt than other U.S. firms. This result is not sensitive to a number of alternative explanations, such as size and industry effects, and appears unaffected by the Tax Reform Act of 1986.
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