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Policy Effects of International Taxation on Firm Dynamics and Capital Structure

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  • Adam Hal Spencer

Abstract

This article develops a quantitative open economy framework with dynamics, firm heterogeneity and financial frictions to study the impact of corporate tax reforms targeted at multinationals. The model quantifies their impact on firm selection, production and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into selling abroad, through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax as in the Tax Cuts and Jobs Act. The reform’s impact trades-off two selection effects—more offshoring versus greater U.S. business dynamism. The reform leads to higher U.S. welfare at little cost to the Treasury. A series of exercises illustrate that the novel features of this framework have significant quantitative implications. The reform gives starkly different cross-sectional predictions and lower welfare gains when financial frictions are removed and it is welfare reducing in a static counterpart of the model.

Suggested Citation

  • Adam Hal Spencer, 2022. "Policy Effects of International Taxation on Firm Dynamics and Capital Structure," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 2149-2200.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:4:p:2149-2200.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab071
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    Citations

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    Cited by:

    1. Radek Šauer, 2022. "Corporate Taxation in Open Economies," CESifo Working Paper Series 9942, CESifo.
    2. Spiros Bougheas & Adam Hal Spencer, 2022. "Fire sales and ex ante valuation of systemic risk: A financial equilibrium networks approach," Discussion Papers 2022/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Dhammika Dharmapala, 2024. "The consequences of the 2017 US international tax reform: a survey of the evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(4), pages 1158-1178, August.
    4. Chadwick Curtis & Julio Garin & Saif Mehkari, 2020. "Repatriation Taxes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 293-313, April.
    5. Spencer, Adam Hal, 2024. "Firing multinational CEOs," Economics Letters, Elsevier, vol. 239(C).
    6. Teodora Borota & Fabrice Defever & Giammario Impullitti, 2019. "Innovation union: costs and benefits of innovation policy coordination," CEP Discussion Papers dp1640, Centre for Economic Performance, LSE.
    7. Priyaranjan Jha & Antonio Rodriguez-Lopez & Adam Hal Spencer, 2023. "Labour market power and the dynamic gains to openness reforms," Discussion Papers 2023-01, University of Nottingham, GEP.
    8. David Kohn & Fernando Leibovici & Michal Szkup, 2021. "Financial Frictions and International Trade," Working Papers 2021-009, Federal Reserve Bank of St. Louis.

    More about this item

    Keywords

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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