IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_9720.html
   My bibliography  Save this paper

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

Author

Listed:
  • Baptiste Souillard

Abstract

Corporate tax avoidance has regularly been accused of aggravating income inequalities. Yet, systematic evidence on this matter is still lacking. To fill this gap, the present paper explores the effect of profit shifting on employee pay among S&P 1500 companies. The study shows that its effect indeed varies across occupations. Chief executive officers and chief financial officers receive higher compensations when their firm starts operating in tax havens. Non-executive employees, if anything, see their wages fall in the meantime. Furthermore, the inequality-deepening impact of firm entry into tax havens is driven by companies that reward executives on an after-tax basis and more pronounced in intangible-intensive companies. These new findings enrich our understanding of the distributional consequences of profit shifting. They also cast light on the evolution of income inequalities, public opinion about globalization, and ongoing debates on international tax reforms.

Suggested Citation

  • Baptiste Souillard, 2022. "Profit Shifting, Employee Pay, and Inequalities: Evidence from US-Listed Companies," CESifo Working Paper Series 9720, CESifo.
    • Handle: RePEc:ces:ceswps:_9720
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp9720.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Karkinsky, Tom & Riedel, Nadine, 2012. "Corporate taxation and the choice of patent location within multinational firms," Journal of International Economics, Elsevier, vol. 88(1), pages 176-185.
    2. Céline Azémar & R. Glenn Hubbard, 2015. "Country characteristics and the incidence of capital income taxation on wages: An empirical assessment," Canadian Journal of Economics, Canadian Economics Association, vol. 48(5), pages 1762-1802, December.
    3. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Firms in the European Union," Sciences Po publications info:hdl:2441/10192, Sciences Po.
    4. Facundo Alvaredo & Lucas Chancel & Thomas Piketty & Emmanuel Saez & Gabriel Zucman, 2017. "Global Inequality Dynamics: New Findings from WID.world," American Economic Review, American Economic Association, vol. 107(5), pages 404-409, May.
    5. Clemens Fuest & Andreas Peichl & Sebastian Siegloch, 2018. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," American Economic Review, American Economic Association, vol. 108(2), pages 393-418, February.
    6. Gravelle, Jennifer, 2013. "Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 185-214, March.
    7. Salvador Barrios & Diego d'Andria, 2020. "Profit Shifting and Industrial Heterogeneity," CESifo Economic Studies, CESifo Group, vol. 66(2), pages 134-156.
    8. Annette Alstadsæter & Salvador Barrios & Gaetan Nicodeme & Agnieszka Maria Skonieczna & Antonio Vezzani, 2018. "Patent boxes design, patents location, and local R&D," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(93), pages 131-177.
    9. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2017. "Large Firms and International Business Cycle Comovement," American Economic Review, American Economic Association, vol. 107(5), pages 598-602, May.
    10. Elhanan Helpman & Oleg Itskhoki & Marc-Andreas Muendler & Stephen J. Redding, 2017. "Trade and Inequality: From Theory to Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 357-405.
    11. Dani Rodrik, 2018. "Populism and the economics of globalization," Journal of International Business Policy, Palgrave Macmillan, vol. 1(1), pages 12-33, June.
    12. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
    13. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    14. Arulampalam, Wiji & Devereux, Michael P. & Maffini, Giorgia, 2012. "The direct incidence of corporate income tax on wages," European Economic Review, Elsevier, vol. 56(6), pages 1038-1054.
    15. Goldbach, Stefan & Nagengast, Arne J. & Steinmüller, Elias & Wamser, Georg, 2019. "The effect of investing abroad on investment at home: On the role of technology, tax savings, and internal capital markets," Journal of International Economics, Elsevier, vol. 116(C), pages 58-73.
    16. Prem Sikka, 2003. "The Role of Offshore Financial Centres in Globalization," Accounting Forum, Taylor & Francis Journals, vol. 27(4), pages 365-399, December.
    17. Krautheim, Sebastian & Schmidt-Eisenlohr, Tim, 2011. "Heterogeneous firms, 'profit shifting' FDI and international tax competition," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 122-133, February.
    18. Dhammika Dharmapala, 2014. "What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 421-448, December.
    19. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    20. Kenneth J. Klassen & Stacie K. Laplante, 2012. "Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?," Journal of Accounting Research, Wiley Blackwell, vol. 50(5), pages 1245-1285, December.
    21. Griffith, Rachel & Miller, Helen & O'Connell, Martin, 2014. "Ownership of intellectual property and corporate taxation," Journal of Public Economics, Elsevier, vol. 112(C), pages 12-23.
    22. Sebastian Beer & Jan Loeprick, 2015. "Profit shifting: drivers of transfer (mis)pricing and the potential of countermeasures," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 426-451, June.
    23. Langenmayr Dominika, 2015. "Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(4), pages 1657-1677, October.
    24. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    25. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    26. Scott D. Dyreng & Jeffrey L. Hoopes & Patrick Langetieg & Jaron H. Wilde, 2020. "Strategic Subsidiary Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 58(3), pages 643-692, June.
    27. Donangelo, Andres & Gourio, François & Kehrig, Matthias & Palacios, Miguel, 2019. "The cross-section of labor leverage and equity returns," Journal of Financial Economics, Elsevier, vol. 132(2), pages 497-518.
    28. Florian Hoffmann & David S. Lee & Thomas Lemieux, 2020. "Growing Income Inequality in the United States and Other Advanced Economies," Journal of Economic Perspectives, American Economic Association, vol. 34(4), pages 52-78, Fall.
    29. Florence Jaumotte & Subir Lall & Chris Papageorgiou, 2013. "Rising Income Inequality: Technology, or Trade and Financial Globalization?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 271-309, June.
    30. Fabio B. Gaertner, 2014. "CEO After†Tax Compensation Incentives and Corporate Tax Avoidance," Contemporary Accounting Research, John Wiley & Sons, vol. 31(4), pages 1077-1102, December.
    31. Mihir A Desai & Dhammika Dharmapala, 2009. "Corporate Tax Avoidance and Firm Value," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 537-546, August.
    32. Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 965-994, November.
    33. Yuqiang Cao & Zhuoan Feng & Meiting Lu & Yaowen Shan, 2021. "Tax avoidance and firm risk: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4967-5000, September.
    34. S. Lael Brainard, 1993. "A Simple Theory of Multinational Corporations and Trade with a Trade-Off Between Proximity and Concentration," NBER Working Papers 4269, National Bureau of Economic Research, Inc.
    35. Scott D. Dyreng & Bradley P. Lindsey, 2009. "Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms' Tax Rates," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1283-1316, December.
    36. Xavier Gabaix & Augustin Landier & Julien Sauvagnat, 2014. "CEO Pay and Firm Size: An Update After the Crisis," Economic Journal, Royal Economic Society, vol. 124(574), pages 40-59, February.
    37. Anna Gumpert & James R. Hines Jr. & Monika Schnitzer, 2016. "Multinational Firms and Tax Havens," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 713-727, October.
    38. Overesch, Michael, 2009. "The Effects of Multinationals’ Profit Shifting Activities on Real Investments," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(1), pages 5-23, March.
    39. Grubert, Harry, 2012. "Foreign Taxes and the Growing Share of U.S. Multinational Company Income Abroad: Profits, Not Sales, Are Being Globalized," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(2), pages 247-281, June.
    40. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7), pages 691-707.
    41. Clausing, Kimberly A., 2013. "Who Pays the Corporate Tax in a Global Economy?," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 151-184, March.
    42. Jones, Chris & Temouri, Yama & Cobham, Alex, 2018. "Tax haven networks and the role of the Big 4 accountancy firms," Journal of World Business, Elsevier, vol. 53(2), pages 177-193.
    43. Céline Azémar & R. Glenn Hubbard, 2015. "Country characteristics and the incidence of capital income taxation on wages: An empirical assessment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(5), pages 1762-1802, December.
    44. Li, Qin & Ma, Mark (Shuai) & Shevlin, Terry, 2021. "The effect of tax avoidance crackdown on corporate innovation," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    45. Hasan, Mostafa Monzur & Lobo, Gerald J. & Qiu, Buhui, 2021. "Organizational capital, corporate tax avoidance, and firm value," Journal of Corporate Finance, Elsevier, vol. 70(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Souillard, Baptiste, 2022. "Corporate tax cuts and firm employment: A match made in haven?," Economics Letters, Elsevier, vol. 219(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Souillard, Baptiste, 2022. "Intra-industry spillovers of profit shifting and investments in tax havens," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 581-599.
    2. Baptiste Souillard, 2020. "Import Competition And Corporate Tax Avoidance: Evidence From The China Shock," Working Papers ECARES 2020-30, ULB -- Universite Libre de Bruxelles.
    3. Cooper, Maggie & Nguyen, Quyen T.K., 2020. "Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda," International Business Review, Elsevier, vol. 29(3).
    4. Annette Alstadsæter & Julie Brun Bjørkheim & Ronald B. Davies & Johannes Scheuerer, 2022. "Pennies from Haven: Wages and Profit Shifting," CESifo Working Paper Series 9590, CESifo.
    5. Hayato Kato & Hirofumi Okoshi, 2022. "Economic Integration And Agglomeration Of Multinational Production With Transfer Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1325-1355, August.
    6. Schwab, Thomas & Todtenhaupt, Maximilian, 2021. "Thinking outside the box: The cross-border effect of tax cuts on R&D," Journal of Public Economics, Elsevier, vol. 204(C).
    7. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    8. Knaisch, Jonas & Pöschel, Carla, 2021. "Corporate Tax Incidence and Wages: A Meta-Regression Analysis," arqus Discussion Papers in Quantitative Tax Research 262, arqus - Arbeitskreis Quantitative Steuerlehre, revised 2021.
    9. Fuest, Clemens & Hugger, Felix & Neumeier, Florian, 2022. "Corporate profit shifting and the role of tax havens: Evidence from German country-by-country reporting data," Journal of Economic Behavior & Organization, Elsevier, vol. 194(C), pages 454-477.
    10. Nadia Accoto & Stefano Federico & Giacomo Oddo, 2023. "Trade in services related to intangibles and the profit shifting hypothesis," Temi di discussione (Economic working papers) 1414, Bank of Italy, Economic Research and International Relations Area.
    11. Müller, Raphael & Spengel, Christoph & Vay, Heiko, 2020. "On the determinants and effects of corporate tax transparency: Review of an emerging literature," ZEW Discussion Papers 20-063, ZEW - Leibniz Centre for European Economic Research.
    12. Joana Garcia, 2022. "Multinationals and services imports from havens: when policies stand in the way of tax planning," Working Papers w202214, Banco de Portugal, Economics and Research Department.
    13. Nelly Exbrayat & Benny Geys, 2016. "Economic Integration, Corporate Tax Incidence and Fiscal Compensation," The World Economy, Wiley Blackwell, vol. 39(11), pages 1792-1811, November.
    14. Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.
    15. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    16. Knoll, Bodo & Riedel, Nadine & Schwab, Thomas & Todtenhaupt, Maximilian & Voget, Johannes, 2021. "Cross-border effects of R&D tax incentives," Research Policy, Elsevier, vol. 50(9).
    17. Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals’ profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 965-994, November.
    18. Salvador Barrios & Diego d'Andria, 2020. "Profit Shifting and Industrial Heterogeneity," CESifo Economic Studies, CESifo Group, vol. 66(2), pages 134-156.
    19. Samiksha Agarwal & Lekha Chakraborty, 2019. "Business Taxation in an Emerging Economy: Analysing Corporate Tax Incidence," Review of European Studies, Canadian Center of Science and Education, vol. 11(2), pages 1-8, December.
    20. Katarzyna Bilicka & Michael Devereux & Irem Güçeri, 2023. "Tax-Avoidance Networks and the Push for a “Historic” Global Tax Reform," Tax Policy and the Economy, University of Chicago Press, vol. 37(1), pages 57-108.

    More about this item

    Keywords

    employee pay; multinational enterprises; profit shifting; tax havens; income inequalities;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_9720. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.