Foreign Tax Holiday Participation and U.S. Employment and Investment Loss

Abstract

We investigate whether foreign tax holiday participation among U.S. multinational companies is associated with offshoring U.S. employment and other domestic investment activities. We find that foreign tax holiday participation is associated with (1) an increase in offshoring U.S. jobs and (2) a decrease in domestic investment, as proxied by employment, capital expenditures, and R&D activity. Furthermore, we find evidence suggesting that the association between targeted, temporary tax incentives provided by foreign tax holidays and firms’ domestic activities is distinct from that of lower foreign statutory tax rates. Overall, the results of this study increase our understanding of firm-level consequences of foreign tax holiday participation, the influence of various tax incentive structures on the allocation of firm resources, and the potential consequences of international tax competition.

Keywords: tax holidays, offshoring, foreign investment, employment

JEL Classification: F23, G31, H25, J21, J22, M16, M41