Profit Shifting, Employee Pay, and Inequalities: Evidence From US-Listed Companies

Abstract

Corporate tax avoidance is regularly blamed for aggravating income inequalities. However, systematic evidence in this direction is still lacking. The present study fills this void. It explores the effect of profit shifting on employee pay among S&P 1500 companies and shows that this effect indeed varies across occupations. Chief executive officers and chief financial officers receive higher compensations when their firm starts operating in tax havens. Non-executive employees, if anything, see their wages fall in the meantime. Furthermore, the inequality-deepening impact of firm entry into tax havens is driven by companies that reward executives on an after-tax basis and is more pronounced in intangible-intensive companies. These new findings document the distributional consequences of profit shifting. They also cast light on the evolution of income inequalities, public opinion about globalization, and ongoing debates on international tax reforms.

Keywords: Employee pay, multinational enterprises, profit shifting, tax havens, income inequalities

JEL Classification: F16, F23, H26, J30, M12