The Impact of the Tax Cuts and Jobs Act on Multinational Profit Shifting (Job Market Paper) 

The US corporate income tax rate was the highest in the developed world, yet multinationals were able to lower their tax burden via the strategic transfer pricing of intra-firm trade. The Tax Cuts and Jobs Act of 2017 (“TCJA”) was nominally an attempt to change corporate profit-shifting incentives with respect to the United States by lowering the US corporate income tax rates as well as by moving from a worldwide to a territory taxation regime. Using Census micro-data consisting of all tangible export transactions between 2014-2019, I examine these differential effects of the TCJA on corporate profit shifting between countries with consistently lower corporate income tax rates and those for whom the tax incentives changed from pushing money out of the US into pulling money in. I find that in the years after the TCJA came into effect, profit shifting to countries with now-higher corporate tax rates fell by between 10.4 to 12.4 percentage points relative to countries whose tax rates remained lower than the US; however, profit-shifting to those countries increased between 8.8 to 11.5 percentage points relative to the pre-period.

A Timeline of Tax Avoidance: Have US Multinationals Changed Their Profit-Shifting Behavior in the 21st Century?

Status: Preliminary Analysis Completed, Results Awaiting Disclosure Review by US Census Bureau.

Since the end of the Great Recession, tax avoidance and profit-shifting has been the subject of intense public scrutiny as well as the focus of numerous international initiatives aimed to curb or control the practice. The pending advent of Pillar II of the Organisation for Economic Cooperation and Development ("OECD")'s Base Erosion and Profit Shifting Initiative aims to fundamentally rewrite the rules of the international taxation system. Yet the impetus for such drastic action remains understudied. Using Census micro-data that allows for precise identification of related party versus unrelated party trade, I estimate the semi-elasticity of profit shifting in tangible goods transactions from the years 1993-2019. Comparing the years 2001-2019 versus a baseline period of 1993-2000, I examine whether or not the tax semi-elasticity as well as the difference between related party and arm's length prices have changed in the first 18 years of the new millennium. Note: Summary has been censored of results pending disclosure review by US Census Bureau.