Does Foreign Tax Arbitrage Promote Innovation?
51 Pages Posted: 16 Nov 2015 Last revised: 23 Jun 2018
Date Written: June 2018
I identify a new category of fiscal policy instruments – those regulating profit shifting activity – as an important determinant of corporate innovation. Using confidential microdata on the foreign and domestic operations of U.S. multinational firms, I document that after an unexpected policy shock that facilitated foreign tax arbitrage, U.S. multinationals shifted more of their taxable income and intellectual property to low tax countries. This increased the after-tax return to innovative activity. In response, U.S. multinationals increased their innovation in the U.S., whether measured using R&D expenditures, patent applications, or patent citations.
Keywords: Multinational firms, tax avoidance, innovation
JEL Classification: F23, H26, O30, O34
Suggested Citation: Suggested Citation