Taxpayer Responses to Competitive Tax Policies and Tax Policy Responses to Competitive Taxpayers : Recent Evidence

Abstract

We use information from the tax returns of U.S. multinational corporations to address\nthree questions related to tax competition. First, does tax competition or company tax planning\nbehavior better explain recent decreases in the local effective tax rates faced by U.S.\nmultinationals investing abroad? Second, have countries become more aggressive in their use of\ntax concessions to attract particular types of foreign capital? And finally, has the role of taxes in\nthe location decisions of U.S. manufacturers increased in recent years?\nBetween 1992 and 2000, the average effective tax rate faced by U.S. manufacturers on\nincome earned abroad fell from 25 percent to 21 percent. Our results suggest that the evolution of\ncountry effective tax rates between 1992 and 1998 seems to be driven by tax competition.\nCountries that lost shares of U.S. manufacturing real capital prior to 1992 cut their rates the most\nover this period. However, the most recent data suggests that companies may not need tax\ncompetition to lower effective tax burdens abroad. The evolution of country effective rates\nbetween 1998 and 2000 seems to be driven by company rather than country behavior. This is\nconsistent with the introduction of the ?check the box? regulations in 1997 which made it easier\nfor corporations to use ?self-help? to lower tax burdens. Interestingly, we find that countries\nwere rewarding more mobile companies and those that were perceived to be more beneficial to\nthe local economy with tax concessions as far back as 1984. Finally, although not conclusive, our\nempirical work suggests that U.S. manufacturers may have become more sensitive to differences\nin local tax rates across countries in recent years.

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