Heads I Win, Tails You Lose: Asymmetric Taxes, Risk Taking, and Innovation

39 Pages Posted: 19 Mar 2019

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison

Date Written: February 25, 2019

Abstract

When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project's profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm's taxes, they can influence the scale and types of projects undertaken.

Keywords: Corporate Risk Taking, Multinational Corporations, Transfer Pricing, Taxation, Profit Shifting, Tax Avoidance, R&D, Intellectual Property, Corporate Investment

JEL Classification: G31, G32, G38, F21, F23, H25, H26, K34, O34, O38

Suggested Citation

Albertus, James F. and Glover, Brent and Levine, Oliver, Heads I Win, Tails You Lose: Asymmetric Taxes, Risk Taking, and Innovation (February 25, 2019). Available at SSRN: https://ssrn.com/abstract=3342577 or http://dx.doi.org/10.2139/ssrn.3342577

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Brent Glover (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://oliverlevine.com

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