Coase-Sandor Working Paper Series in Law and Economics

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Working Paper

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The 2017 US tax legislation - widely referred to as the Tax Cut and Jobs Act (TCJA) - fundamentally transformed the US system of international taxation, introducing for instance a new tax on “Global Intangible Low-Taxed Income” (GILTI). This paper develops a simple conceptual framework that synthesizes and extends the theory of multinational corporations’ (MNCs’) responses to taxation. It also surveys the emerging empirical evidence on the consequences of the TCJA’s international provisions. The conceptual framework focuses on the efficiency costs of ownership distortions in analyzing the impact of the GILTI tax and the prior repatriation tax on foreign acquisitions by US MNCs. The paper derives a set of sufficient conditions under which changes in US MNCs’ foreign activity in response to the TCJA imply an unambiguous reduction in both US national welfare and global welfare. Drawing on the empirical literature on the impact of the TCJA, the paper documents five robust findings: the TCJA led to a general decline in US MNCs’ foreign acquisitions, increased US MNCs’ investment in routine foreign tangible assets, led (at most) to a decline in profit shifting to the extent expected from the TCJA’s tax rate reduction (suggesting no impact of its international provisions per se), reduced the market value of US MNCs relative to domestic US firms, and had no detectable impact on domestic US investment and wages. The first two of these findings correspond closely to the model’s sufficient conditions for an unambiguous decline in US and global welfare, while the other findings provide additional support for this conclusion. An illustrative calculation based on the magnitude of the first effect suggests that the TCJA nearly doubled the synergy losses associated with US taxation of US MNCs’ foreign activity.

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