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Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms


Mihir A. Desai


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

March 20, 2009

Harvard Business School Finance Working Paper No. 09-107

Abstract:     
Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper address these questions by analyzing the available evidence on two related claims - i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.

Number of Pages in PDF File: 30

Keywords: Tax Policy, Multinational Firms, Protectionism, Investment, Deferral, Corporations

JEL Classification: F23, H25

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Date posted: March 21, 2009 ; Last revised: April 30, 2009

Suggested Citation

Desai, Mihir A., Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms (March 20, 2009). Harvard Business School Finance Working Paper No. 09-107. Available at SSRN: http://ssrn.com/abstract=1365907 or http://dx.doi.org/10.2139/ssrn.1365907

Contact Information

Mihir A. Desai (Contact Author)
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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