Profit Shifting, Employee Pay, and Inequalities: Evidence From US-Listed Companies

Abstract

Over the last few years, corporate tax avoidance has become a salient policy issue and has regularly been accused of aggravating income inequalities. Yet, systematic empirical evidence on its distributional implications remains lacking. In this paper, I explore the effect of profit shifting activities of multinational enterprises on employee pay. Using a rich database on executives, foreign subsidiaries, and financial statements of US-listed companies, I find that this effect substantially varies across occupations: while the compensation of chief executive officers and chief financial officers increases when their firm enters tax havens, non-executives, on the contrary, see their wage fall. Also, these reactions are more pronounced in intangible-intensive sectors. These new empirical findings are consistent with economic theory, cast light on the consequences of profit shifting, and might help explain recent trends in income inequalities.