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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Substance Requirements in the International Taxation of Intangible Capital: A Double-edged Sword? (with Kartikeya Singh and Aparna Mathur), Public Finance Review
The perverse effect of sin taxes: The rise of illicit white cigarettes (with Roger Bate and Aparna Mathur), Applied Economics
Financial Development and Economic Growth at Different Income Levels, Stanford Economic Review
Works in Progress
Optimal Corporate Taxation with Heterogeneous Multinationals: This paper explores how multinational production, profit shifting and offshoring change economic effects of corporate income taxes and optimal corporate tax designs, within a multi-country general equilibrium framework. A corporate tax design consists of three policy tools: the tax rate, the share of the normal return on capital included in the tax base, and the tax system for multinationals (territorial, residential, or worldwide). The model produces four “beggar-thy-neighbor” policy externalities: lower tax rates because of profit shifting; lower average tax rates to draw foreign investment and reduce offshoring; higher tax rates on foreign firms to redistribute from foreign shareholders to domestic households; and effects on the shared gains from trade and multinational production. Optimal corporate taxes do not distort investment at the intensive margin. Unlike in prior papers, tax competition may not reduce corporate tax rates, as governments can also respond by switching between tax systems. Because of the policy externalities, Nash equilibrium tax rates may be higher or lower than total welfare-maximizing rates. Tax competition therefore could increase or decrease welfare. DRAFT
Stockouts and Shortages: Supply-Demand Mismatch in Equilibrium: In theory, markets clear in equilibrium; in practice, they don’t. Goods-producing firms can stock out of goods to sell, leaving some customers empty-handed. For service providers, excess demand may force them to ration their services, like a busy restaurant on a Saturday night. These mismatches between supply and demand have become particularly salient during the pandemic, with well-publicized shortages of goods ranging from toilet paper to automobiles. In this paper, I develop a model of demand and supply mismatches based on imperfect forecasting of idiosyncratic demand shocks, embedded in a DSGE framework. Shortages of consumer goods create unpriced welfare losses for consumers; an increase in shortages in equilibrium operates as a form of shadow inflation. This welfare loss introduces an extra component to the stochastic discount factor, operating as a microfounded version of the external habits framework from Campbell and Cochrane (1999), although with dynamics governed by the model in equilibrium. The estimated model matches external data on stockout rates historically and during the pandemic. DRAFT
Inflation and Skimpflation: In 2021 and 2022, consumers faced high inflation, as measured by official statistics, but they also experienced worsening quality of goods and services, a phenomenon that NPR described as “skimpflation”. Essentially, goods and services consist of combinations of inputs; when relative prices change, these combinations of inputs may change in ways that reduce the quality of the product. This reduction in quality behaves similarly to inflation but is not captured by inflation statistics. In this paper, I construct a model to measure the welfare effects of skimpflation. Each good or service consists of different combinations of inputs, and consumers have preferences over these combinations. When all prices grow at the same rate, these combinations do not change. However, shocks to the relative prices of these inputs change firms’ use of these inputs, which can reduce the consumer value of the product.