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Policy effects of international taxation on firm dynamics and capital structure

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  • Adam Hal Spencer

Abstract

This paper 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 quantities their impact on productivity, GDP and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into servicing an overseas market, either through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax, an aspect of the Tax Cuts and Jobs Act. The reform's impact trades-off two selection effects more offshoring versus greater business dynamism from increased proftability. The reform leads to higher U.S. welfare and revenue neutrality. A series of exercises illustrate that the novel features of this framework have signifcant quantitative implications. The reform's beneficial effects are mitigated considerably when financial frictions are removed and it appears to be welfare reducing when using a static analogue of the model.

Suggested Citation

  • Adam Hal Spencer, 2020. "Policy effects of international taxation on firm dynamics and capital structure," Discussion Papers 2020-25, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:2020-25
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    1. 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.

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    More about this item

    Keywords

    dynamics; financial frictions; productivity; corporate tax; firm heterogeneity; FDI; repatriation tax;
    All these keywords.

    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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