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The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies

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  • Rosanne Altshuler
  • Harry Grubert

Abstract

Most studies of tax competition and the race to the bottom focus on potential host countries competing for mobile capital, neglecting the role of corporate tax planning and of home governments that facilitate this planning. This neglect in part reflects the narrow view frequently taken of the policy instruments that countries have available in tax competition. But high-tax host governments can, for example, permit income to be shifted out to tax havens as a way of attracting mobile companies. Home countries will cooperate in this shift if their companies’ gain is greater than any reduction in the domestic tax base. We use various types of U.S. data, including firm level tax files, to identify the role of the three parties (host governments, home governments and MNCs) in the evolution of tax burdens on U.S. companies abroad from 1992 to 2002. This period is of particular interest because the United States introduced regulations in 1997 that greatly simplified the use of more aggressive tax planning techniques. The evidence indicates that from 1992 to 1998 the decline in effective tax rates on U.S. companies was driven largely by host governments defending their market share. But after 1998, tax avoidance behavior seems much more important. One indication is that effective tax rates on U.S. companies had a much weaker link with local statutory tax rates. After 1997, the new regulations motivated a very large growth in intercompany payments and a parallel growth of holding company income abroad. We attempt to estimate how many of these payments were deductible in the host country, and conclude that by 2002 the companies were saving about $7.0 billion per year by using the more aggressive planning strategies. This amounts to about 4 percent of companies’ foreign direct investment income and about 15 percent of their foreign tax burden.

Suggested Citation

  • Rosanne Altshuler & Harry Grubert, 2005. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," CESifo Working Paper Series 1613, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1613
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    References listed on IDEAS

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    1. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
    2. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    3. Rosanne Altshuler & Harry Grubert, 2004. "Taxpayer Responses to Competitive Tax Policies and Tax Policy Responses to Competitive Taxpayers: Recent Evidence," Departmental Working Papers 200406, Rutgers University, Department of Economics.
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    Cited by:

    1. Niels Johannesen, 2012. "Cross-border hybrid instruments," EPRU Working Paper Series 2012-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    2. Eric J. Allen & Susan C. Morse, 2013. "Tax-Haven Incorporation for U.S.-Headquartered Firms: No Exodus Yet," National Tax Journal, National Tax Association, vol. 66(2), pages 395-420, June.
    3. Niels Johannesen, 2011. "Strategic Line Drawing between Debt and Equity," EPRU Working Paper Series 2011-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. Dhammika Dharmapala, 2008. "What problems and opportunities are created by tax havens?," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 661-679, winter.
    5. repec:dau:papers:123456789/179 is not listed on IDEAS
    6. Krishanu Karmakar & Jorge Martinez-Vazquez, 2014. "Fiscal Competition versus Fiscal Harmonization: A Review of the Arguments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1431, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Harry Grubert, 2009. "Foreign Taxes, Domestic Income, and the Jump in the Share of Multinational Company Income Abroad," Working Papers 0926, Oxford University Centre for Business Taxation.
    8. Rosanne Altshuler & Timothy J. Goodspeed, 2015. "Follow the Leader? Evidence on European and US Tax Competition," Public Finance Review, , vol. 43(4), pages 485-504, July.
    9. Rosanne Altshuler & Alan J. Auerbach & Michael Cooper & Matthew Knittel, 2009. "Understanding U.S. Corporate Tax Losses," NBER Chapters,in: Tax Policy and the Economy, Volume 23, pages 73-122 National Bureau of Economic Research, Inc.
    10. Julian Alworth & Giampaolo Arachi, 2008. "Taxation Policy in EMU - Julian Alworth and Giampaolo Arachi," European Economy - Economic Papers 2008 - 2015 310, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    11. Cen, Ling & Maydew, Edward L. & Zhang, Liandong & Zuo, Luo, 2017. "Customer–supplier relationships and corporate tax avoidance," Journal of Financial Economics, Elsevier, vol. 123(2), pages 377-394.

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