Policy Effects of International Taxation on Firm Dynamics and Capital Structure

88 Pages Posted: 4 Mar 2016 Last revised: 8 Jul 2021

See all articles by Adam Spencer

Adam Spencer

The University of Nottingham

Date Written: June 7, 2021

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 quantifies their impact on firm selection, production and welfare. Firms draw idiosyncratic shocks, invest in capital, choose optimal financing and select endogenously into selling abroad, through exporting or FDI. I apply this framework to the removal of the U.S. repatriation tax as in the Tax Cuts and Jobs Act. The reform's impact trades-off two selection effects --- more offshoring versus greater U.S. business dynamism. The reform leads to higher U.S. welfare at little cost to the Treasury. A series of exercises illustrate that the novel features of this framework have significant quantitative implications. The reform gives starkly different cross-sectional predictions and lower welfare gains when financial frictions are removed and it is welfare reducing in a static counterpart of the model.

Keywords: Dynamics, Financial Frictions, Productivity, Corporate Tax, Firm Heterogeneity, FDI, Repatriation Tax

JEL Classification: E62, F23, G32, H25, L11

Suggested Citation

Spencer, Adam, Policy Effects of International Taxation on Firm Dynamics and Capital Structure (June 7, 2021). Available at SSRN: https://ssrn.com/abstract=2742006 or http://dx.doi.org/10.2139/ssrn.2742006

Adam Spencer (Contact Author)

The University of Nottingham ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://adamhalspencer.com

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