Watch What I Do, Not What I Say: the Unintended Consequences of the Homeland Investment Act

45 Pages Posted: 3 Jun 2009 Last revised: 21 Jul 2010

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

C. Fritz Foley

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

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2009

Abstract

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

Suggested Citation

Dharmapala, Dhammika and Foley, C. Fritz and Forbes, Kristin J., Watch What I Do, Not What I Say: the Unintended Consequences of the Homeland Investment Act (June 2009). NBER Working Paper No. w15023. Available at SSRN: https://ssrn.com/abstract=1413587

Dhammika Dharmapala

University of Chicago Law School ( email )

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C. Fritz Foley (Contact Author)

Harvard Business School ( email )

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National Bureau of Economic Research (NBER)

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Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/kjforbes/www

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