Abstract
I develop and estimate an industry equilibrium model with heterogeneous multinational firms to study the impact of a potential policy change from the current U.S. worldwide taxation system to a territorial system on firm investment, capital structure and tax revenues. Firms in the model make both intensive and extensive margin decisions in terms of overseas investment. They optimally choose dividend payments to shareholders, holdings of riskless debt securities and earnings repatriations from the subsidiary to the parent in each period. To estimate the impact of the policy change, I solve the model under both worldwide and territorial systems and compare the stationary equilibria. The results show that the policy change causes both domestic and overseas investment by U.S. firms to rise. In addition, firms borrow more and pay larger dividends to shareholders. These effects on firm variables are coupled with a rise in U.S. Government tax collections.
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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