Kimberly A. Clausing

Tax-motivated transfer pricing and US intrafirm trade prices

Abstract This paper analyzes monthly data on US international trade prices between 1997 and 1999 in order to investigate the impact of tax influences on intrafirm trade prices. Results indicate that there is substantial evidence of tax-motivated transfer pricing in US intrafirm trade prices. There is a strong and statistically significant relationship between countries’ tax rates and the prices of intrafirm transactions. Controlling for other variables that affect trade prices, as country tax rates are lower, US intrafirm export prices are lower, and US intrafirm import prices are higher. This finding is consistent with theoretical predictions regarding tax-motivated income shifting behavior.

Trade creation and trade diversion in the Canada - United States Free Trade Agreement

In this paper the changes in trade patterns introduced by the Canada-United States Free Trade Agreement are examined. Variation in the extent of tariff liberalization under the agreement is used to identify the impact of tariff liberalization on the growth of trade both with member countries and non-member countries. Data at the commodity level are used, and the results indicate that the Canada-United States Free Trade Agreement had substantial trade creation effects, with little evidence of trade diversion.

Closer Economic Integration and Corporate Tax Systems

This article investigates two aspects of corporate income taxation: the determinants of corporate tax rates and the determinants of corporate tax revenues. In the context of theoretically informed empirical models, the analysis examines the influence of increasing economic integration on corporate tax rates and corporate tax revenues, focusing in particular on the case of European Union member and applicant countries. The investigation utilizes a data set of 36 OECD and European countries over the period from 1979 to 2002. Findings are consistent with theoretical expectations: more integrated countries chose lower corporate tax rates, while larger countries, those with bigger governments, and those with higher individual income tax rates chose higher rates. Corporate tax revenues are found to be parabolically related to tax rates. Further, this parabolic relationship is steeper as economies are more integrated, implying a lower revenue-maximizing tax rate for such countries.

In Search of Corporate Tax Incidence

This paper reviews existing theory and empirical evidence concerning corporate tax incidence. Corporate tax incidence is difficult to establish in theory since the burden of corporate taxation will depend on at least five crucial economic parameters. Further, even if these parameters can be agreed upon, theoretical models of corporate taxation neglect at least seven important considerations. Unfortunately, existing empirical work does not provide clarification, since much of the work either relies on inappropriate tests of general equilibrium tax incidence or suffers from data or methodological limitations. This paper attempts to improve knowledge in this area by undertaking a comprehensive series of analyses of multiple data sources on labor market outcomes and corporate taxation. The analyses are informed by open-economy general equilibrium corporate tax incidence models, and they focus on OECD countries over the period 1981-2009. Results indicate substantial uncertainty regarding what fraction of the corporate tax burden falls on labor, but there is no robust evidence that corporate tax burdens have large depressing effects on wages. These results stand in contrast to findings of other papers; I discuss several possible reasons for this divergence.

The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond

This paper estimates the effect of profit shifting on corporate tax base erosion for the United States, using Bureau of Economic Analysis survey data on U.S. multinational corporations during 1983 to 2012. I find that profit shifting is likely costing the U.S. government between

A Proposal to Adopt Formulary Apportionment for Corporate Income Taxation: The Hamilton Project

77 billion and

The Role of U.S. Tax Policy in Offshoring

111 billion in corporate tax revenue by 2012, and these revenue losses have increased substantially in recent years. The paper also extends this analysis to other countries, finding that corporate tax base erosion is likely a large problem in countries without low tax rates. The paper discusses suggested reforms.

Problems with Destination-Based Corporate Taxes and the Ryan Blueprint

The current system of taxing the income of multinational firms in the United States is flawed across multiple dimensions. The system provides an artificial tax incentive to earn income in low-tax countries, rewards aggressive tax planning, and is not compatible with any common metrics of efficiency. The U.S. system is also notoriously complex; observers are nearly unanimous in lamenting the heavy compliance burdens and the impracticality of coherent enforcement. Further, despite a corporate tax rate one standard deviation above that of other OECD countries, the U.S. corporate tax system raises relatively little revenue, due in part to the shifting of income outside the U.S. tax base. In this proposal, we advocate moving to a system of formulary apportionment for taxing the corporate income of multinational firms. Under our proposal, the U.S. tax base for multinational corporations would be calculated based on a fraction of their worldwide income. This fraction would simply be the share of their worldwide sales that occur in the United States. This system is similar to the current method that U.S. states use to allocate national income across states. The state system arose due to the widespread belief that it was impractical to account separately for what income is earned in each state when states are highly integrated economically. Similarly, in an increasingly global world economy, it is difficult to assign profits to individual countries, and attempts to do so are fraught with opportunities for tax avoidance. Under our proposed formulary apportionment system, firms would no longer have an artificial tax incentive to shift income to low-tax locations. This would help protect the U.S. tax base while reducing the distortionary features of the current tax system. In addition, the complexity and administrative burden of the system would be reduced. The proposed system would be both better suited to an integrated world economy and more compatible with the tax policy goals of efficiency, equity, and simplicity.

Lessons for International Tax Reform from the US State Experience Under Formulary Apportionment

U.S. corporate tax policy affects firms’ choices regarding offshoring in important ways. The decision about how to provide an intermediate good or service is influenced by the tax treatment afforded different modes of provision. In addition, when firms choose to provide an intermediate good or service via in-house offshoring (foreign direct investment), their choice of country as well as their subsequent financial decisions regarding these transactions are influenced by international tax incentives. This paper examines the role of U.S. corporate tax policy in influencing offshoring behavior. It addresses four related questions. First, how does the U.S. tax system operate? I address how the current U.S. tax system is designed and how recent legislative changes have affected that design. Second, what are the incentives provided by this system? I examine how the U.S. system of taxation affects the decision to offshore activities, the choice of foreign country for offshoring operations, and the nature of offshoring transactions. I also briefly describe the extent to which the U.S. system differs from those in other countries. Third, what should an international tax system do? I discuss four potential goals for an international tax system: enhancing efficiency, improving macroeconomic indicators, augmenting external effects associated with multinational activity, and generating government revenue. Finally, given the current U.S. system as well as these goals, what are the merits of suggested policy alternatives? I evaluate several major policy design changes with respect to these policy goals; I also consider pragmatic smaller changes that could improve the functioning of the U.S. tax system.

Beyond Territorial and Worldwide Systems of International Taxation

With the election of Donald Trump and the Republican Party’s domination of Congress, House Speaker Paul Ryan’s blueprint for fundamental tax reform requires more careful analysis. The Ryan blueprint combines reduced individual rates with a destination-based cash flow type business tax applicable to all businesses. The destination based business tax at the center of the blueprint has several major problems: It is incompatible with our WTO obligations, it is incompatible with our tax treaties, and it will not eliminate the problems of income shifting and inversions it is designed to address. In addition, these proposals generate vexing technical problems that are not easily fixed as well as significant political problems. Finally, due to the tax rates that have been proposed, the plan is likely to generate large revenue losses and a less progressive tax system. We conclude by recommending better tax policy solutions to our current corporate tax problems.