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Can a Single Country Increase the Taxes of Multinational Corporations? Evidence from the Impact of the 1993 Corporate Tax Rate Increase on Fortune 500 Companies

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  • Nathan M. Jensen
  • Adam H. Rosenzweig

Abstract

There is a debate in the literature about the ability of multinational corporations to use legal mechanisms, such as transfer pricing and intercompany debt, to prevent any one country from meaningfully increasing effective tax rates (ETRs) on corporations. Evidence suggests that tremendous shifting of profits across borders is occurring, leading to calls for significant policy responses. At the same time, multinational companies are also observed relocating their headquarters or reincorporating in foreign jurisdictions, at least in part for tax reasons. This has led many to claim that international tax in a globalized world has devolved into a race to the bottom. In response, multinational organizations such as the OECD and G‐20 have called for increased multilateralism and cooperation as the last, best hope for the international tax regime. Yet, to date little has been written on the extent to which any one, single country can meaningfully increase taxes on multinational companies unilaterally through changes in rate. We contribute to this literature by designing an empirical study of whether and to what extent a largely unanticipated tax rate increase in a single country affects the ultimate tax liability of multinational corporations. We do so by examining how an actual increase in corporate tax rates in the United States impacted worldwide cash taxes for Fortune 500 companies. Using the 1 percent corporate tax rate increase enacted in 1993, which was enacted for one year without any accompanying base changes, we find that this rate increase led to an increase in worldwide cash taxes reported by multinational companies across the board. We include a number of case studies to further explore the implications of this tax increase. These case studies support the contention that little tax avoidance occurred immediately in response to the increase in the tax rate.

Suggested Citation

  • Nathan M. Jensen & Adam H. Rosenzweig, 2015. "Can a Single Country Increase the Taxes of Multinational Corporations? Evidence from the Impact of the 1993 Corporate Tax Rate Increase on Fortune 500 Companies," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 12(4), pages 757-780, December.
    • Handle: RePEc:wly:empleg:v:12:y:2015:i:4:p:757-780
    DOI: 10.1111/jels.12091
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