JOB MARKET PAPER
Profit Shifting and Investment by Multinationals
Abstract: This paper examines how profit shifting impacts cross-border investment by multinational firms. Using a joint model of profit shifting and investment, I show that profit shifting increases investment in high-tax countries and in low-tax countries by reducing the corporate tax distortion on investment in high-tax countries. This interaction induces endogenous patterns of complementarities between investment in different countries, which increase business cycle correlations between high-tax and low-tax countries and decrease them between high-tax (low-tax) and other high-tax (low-tax) countries. I find supportive evidence for the interaction between profit shifting and investment using a heterogeneous firm, mixed effects regression analysis. I also provide causal evidence supporting the international shock transmission channel using an event study around the check-the-box regulation. In equilibrium, eliminating profit shifting would increase U.S. corporate tax revenue, but it would decrease aggregate consumption in the U.S. by 1.25 percent and in the rest of the world by 0.19 percent, as well as reducing world GDP by 0.38 percent overall.
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Works in Progress
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