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Before International Tax Reform, We Need to Understand Why Firms Invert

Wharton Public Policy Initiative Issue Brief, Volume 5, Issue 8, September 2017.

U of Penn, Inst for Law & Econ Research Paper No. 17-44

9 Pages Posted: 17 Oct 2017  

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Date Written: September 2017

Abstract

A wave of corporate inversions by U.S. firms over the past two decades has generated substantial debate in academic, business, and policy circles.

The core of the debate hinges on a couple of key economic questions: Do U.S. tax laws disadvantage U.S.-domiciled companies relative to their foreign competitors? And, if so, do inversions improve the competitiveness of U.S. multinational firms both abroad and at home?

There is unfortunately little, if any, empirical work directly determining whether U.S.-based MNCs are currently tax-disadvantaged compared to their foreign rivals, or measuring the amount by which (if any) U.S.-based MNCs improve their competitive position by inverting.

This brief, however, summarizes both old and new research that views these questions through the lens of corporations’ global effective tax rates (ETRs), and finds that the stronger case seems to be that U.S.-domiciled corporations are often tax-disadvantaged and that they can improve their competitive position by inverting.

Additional evidence also suggests that U.S. MNCs can increase their after-tax cash flow by inverting.

Inversions indicate that something is fundamentally wrong with the tax system. The brief concludes by discussing two feasible paths forward for reform.

Keywords: Taxation, law & economics, corporations, multi-national business organizations, foreign competition, re-flagging of MNCs, inversions, global effective tax rates, tax disadvantages of U.S.-domiciled corporations, motivations to invert, improving competitiveness, post-inversion ETRs

JEL Classification: F22, K34, P12, P16

Suggested Citation

Knoll, Michael S., Before International Tax Reform, We Need to Understand Why Firms Invert (September 2017). Wharton Public Policy Initiative Issue Brief, Volume 5, Issue 8, September 2017.; U of Penn, Inst for Law & Econ Research Paper No. 17-44. Available at SSRN: https://ssrn.com/abstract=3054104

Michael Knoll (Contact Author)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

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