Income Shifting as an Aspect of Tax Avoidance: Evidence from U.S. Multinational Corporations

Abstract

We use jurisdiction-specific effective tax rates (ETRs) to investigate income shifting as an aspect of tax avoidance by U.S. firms. Our central hypothesis is that tax-based incentives for shifting income, as measured by the spread between domestic and foreign ETRs, should be reflected in the share of pre-tax income earned by U.S. firms in foreign jurisdictions. We find substantial support for this hypothesis in the data. Specifically, there is robust evidence of a positive correlation between the foreign share of pre-tax income and the ETR spread that is consistent with firms shifting income both into and out of the United States. We also find that firms respond asymmetrically to positive and negative ETR spreads. In particular, the evidence indicates that the response to a negative spread is stronger than to a positive spread of the same magnitude. This finding is qualitatively consistent with the argument that the limitation on foreign tax credits diminishes the benefit of shifting income out of the United States.