Abstract
Abstract This article develops a quantitative open economy framework with dynamics, firm heterogeneity and financial frictions to study the impact of corporate tax reforms targeted at multinationals. The model quantifies their impact on firm selection, production and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into selling abroad, through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax as in the Tax Cuts and Jobs Act. The reform’s impact trades-off two selection effects—more offshoring versus greater U.S. business dynamism. The reform leads to higher U.S. welfare at little cost to the Treasury. A series of exercises illustrate that the novel features of this framework have significant quantitative implications. The reform gives starkly different cross-sectional predictions and lower welfare gains when financial frictions are removed and it is welfare reducing in a static counterpart of the model.
Highlights
The activities of multinational firms account for almost one-third of world GDP and about one-fourth of employment (OECD, 2018a).Multinational firms are large, profitable and have considerable influence over goods and factor markets
In 2019 the OECD put forward proposals for coordinated global corporate taxation and a move away from a production-based to a sales-based system (OECD, 2019)
Tax reforms targeted at multinational firms have been pervasive in recent years
Summary
The activities of multinational firms account for almost one-third of world GDP and about one-fourth of employment (OECD, 2018a). Some of the major beneficiaries of the reform are large incumbent exporters who seek to change their status to multinational These firms downsize their domestic operations gradually ly in the dynamic model given the presence of capital adjustment costs, thereby slowing the pace of offshoring. Gourio & Miao (2009) conduct quantitative exercises with reft spect to dividend tax reforms using a calibrated model of heterogeneous firms and financial frictions Studies in this area typically have a closed economy partial equilibrium setup. In terms of the supply of F labour ly and global investment goods, I assume for simplicity that the F household supplies each factor perfectly elastically at the prevailing price level, (i.e. Wt∗ and Λt respectively) Their n demand for F goods is taken to be exogenous. O iii. Home Firms ft the environment for H firms is described; variety-level notation will be ra omitted for ease of exposition
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