RUI: International Taxation and the International Trade of Multinational Firms

Reed College, Portland OR

Investigators

Abstract

This research investigates the relationship between the international taxation of corporate income and the international trade of multinational firms. About 40 percent of all U.S. international trade is intrafirm trade, or international trade that occurs between two affiliates of a multinational firm. Preliminary evidence suggests that multinational firms alter the prices on their intrafirm trade transactions in order to minimize their worldwide tax burden. For example, by underpricing goods sold to affiliates in low tax countries and overpricing goods purchased from affiliates in low-tax countries, a multinational firm can shift income to more lightly taxed locations. The opposite strategy applies to transactions with high tax countries. The first goal of the research is to examine the magnitude of such income shifting, analyzing the pattern of such behavior in different industries. The empirical analysis will consider the relationship between intrafirm trade prices and the tax rate of the partner country, employing detailed data on intrafirm trade prices from the Bureau of Labor Statistics. The second goal of the proposed research will be to consider the consequences of this behavior for (a) the volumes of U.S. international trade with different countries and (b) U.S. federal government revenue collections. This analysis will rely in part on data from the Bureau of Economic Analysis on the operations of U.S. multinational firms. Third, this research will consider an alternative international taxation system, formula apportionment. Under this system, U.S. multinational firms would be taxed based on the share of their worldwide activity (measured by sales, payroll, or assets) located in the United States, rather than based on the income they incur in the United States. The revenue consequences of this system will be explored. This research will be informative for those scholars and policy makers who are interested in tax policy as well as those interested in trade patterns. For example, the extent to which multinational firms avoid taxation by shifting their income to low-tax countries affects our assessment of the fairness and efficiency of the current international tax system. By directly comparing the current system with an alternative, formula apportionment, more can be learned about the costs and benefits of these two options. Further, the tax minimizing behavior of multinational firms also affects the pattern of U.S. international trade in ways that trade economists have neglected. A final goal of the research will be to positively impact the research and educational environment of Reed College. This will be done by strengthening the principal investigator's abilities as a researcher, by working closely with undergraduate students on the proposed research, and by sharing data and research findings with students and researchers both at Reed and elsewhere.