The impact of United States tax law revision on multinational corporations' capital location and income shifting decisions.

The recent Presidential campaign highlighted national concerns that multinational corporations manipulate income reporting across countries to reduce US tax. Policy makers are also concerned that US tax law revision may diminish capital formation in the US. This paper develops and tests a model of US domiciled multinational corporations' (MCs') behavior in response to unilateral US tax law revision. The tests compare MCs' US and world-wide income and investment activities before and after the Tax Reform Act of 1986 (TRA 86). The results of these tests generally are consistent with increased income shifting due to lower US tax rates and global tax minimization. Similarly, the results are consistent with US firms investing relatively more in foreign jurisdictions after TRA 86, but not at the expense of US investment. Thus, this study should be of interest to policy makers interested in the effects of tax law on tax avoidance and capital location. This study expands existing research in several ways. First, it develops a model of MCs' behavior extending prior work to separately encompass the tax treatment of revenue and deductions, a key element of TRA 86. Second, the predictions of the model are tested with a more exact research design utilizing a micro-level model of the income generating and capital investment processes. This paper also contributes to the empirical literature. First, the results of this project are consistent with prior work on income shifting with a more robust time-series design. Second, the analytical model suggests a variety of hypotheses which are separately tested. Such triangulation, given consistent findings, also increase the reliability of the results and similarly strengthen the causal inference. Finally, this paper provides evidence about the specific impact of TRA 86 on corporate behavior.Ph.D.AccountingCommerce-BusinessFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/129268/2/9423199.pd