This paper analyzes the effect of repatriation taxes on dividend payments by the foreign affiliates of American multinational firms. The United States taxes the foreign incomes of American companies, grants credits for any foreign income taxes paid, and defers any taxes due on the unrepatriated earnings for those affiliates that are separately incorporated abroad. This system thereby imposes repatriation taxes that vary inversely with foreign tax rates and that differ across organizational forms. As a consequence, it is possible to measure the effect of repatriation taxes by comparing the behavior of foreign subsidiaries that are subject to different tax rates and by comparing the behavior of foreign incorporated and unincorporated affiliates. Evidence from a large panel of foreign affiliates of U.S. firms from 1982 to 1997 indicates that one percent lower repatriation tax rates are associated with one percent higher dividends. This implies that repatriation taxes reduce aggregate dividend payouts by 12.8 percent, and, in the process, generate annual efficiency losses equal to 2.5 percent of dividends. These effects would disappear if the United States were to exempt foreign income from taxation.
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8507.
Length: Date of creation: Oct 2001 Date of revision: Handle: RePEc:nbr:nberwo:8507
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
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Auerbach, Alan J. & Hines, James Jr., 2002.
"Taxation and economic efficiency,"
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in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Roger H. Gordon & James R. Hines Jr., 2002.
"International Taxation,"
NBER Working Papers
8854, National Bureau of Economic Research, Inc.
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Gordon, Roger H. & Hines, James Jr, 2002.
"International taxation,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995
Elsevier.
[Downloadable!] (restricted)
James R. Hines Jr., 2005.
"Do Tax Havens Flourish?,"
NBER Chapters,
in: Tax Policy and the Economy, Volume 19, pages 65-100
National Bureau of Economic Research, Inc.
[Downloadable!]