The Missing Profits of Nations

52 Pages Posted: 13 Jun 2018

See all articles by Thomas Tørsløv

Thomas Tørsløv

University of Copenhagen

Ludvig Wier

University of Copenhagen

Gabriel Zucman

University of California, Berkeley - Department of Economics

Date Written: June 2018

Abstract

By exploiting new macroeconomic data known as foreign affiliates statistics, we show that foreign firms are an order of magnitude more profitable than local firms in tax havens, but less profitable than local firms in other countries. Leveraging this differential profitability, we estimate that close to 40% of multinational profits are shifted to tax havens globally each year. The non-haven European Union countries appear to be the main losers from this shifting. We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places. This policy failure can explain the persistence of profit shifting to tax havens despite the sizable costs involved for high-tax countries. We provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting, showing that the rise of the global corporate capital share is significantly underestimated.

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Suggested Citation

Tørsløv, Thomas and Wier, Ludvig and Zucman, Gabriel, The Missing Profits of Nations (June 2018). NBER Working Paper No. w24701. Available at SSRN: https://ssrn.com/abstract=3194743

Thomas Tørsløv (Contact Author)

University of Copenhagen

Nørregade 10
Copenhagen, DK-1165
Denmark

Ludvig Wier

University of Copenhagen

Nørregade 10
Copenhagen, DK-1165
Denmark

Gabriel Zucman

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

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