Tax Avoidance Activities of U.S. Multinational Corporations
42 Pages Posted: 16 Aug 2002
Date Written: July 11, 2002
This paper investigates whether economies of scale and scope exist for tax planning. In particular, do multinational corporations avoid more taxes than U.S. domestic-only companies, resulting in lower effective tax rates? While the empirical results indicate that ceteris paribus, larger corporations have higher effective tax rates, firms with greater pre-tax income have lower effective tax rates. The negative relation between ETRs and pre-tax income is consistent with firms with greater pre-tax income having more incentives and resources to engage in tax planning.
Consistent with multinational corporations being able to avoid income taxes that domestic-only companies cannot, I find that multinational corporations with more extensive foreign operations have lower worldwide ETRs than other firms do. Finally, in a sample of multinational corporations only, I find that higher levels of U.S. pre-tax income are associated with lower U.S. and foreign ETRs, while higher levels of foreign pre-tax income are associated with higher U.S. and foreign ETRs. Thus, large amounts of foreign income are associated with higher corporate tax burdens. Overall, I find substantial evidence of economies of scale and scope to tax planning.
JEL Classification: H25, M41, M49
Suggested Citation: Suggested Citation