Investor Responses to Dividends Received Deductions: Rewarding Multinational Tax Avoidance?

Central to the debate over U.S. international tax reform is understanding how multinational tax avoidance behavior might respond to a reduction in taxes on repatriated foreign-source earnings. Beginning in early 2009, several attempts have been made to re-institute a temporary 85 percent dividends received deduction that would have reduced such taxes for U.S. multinational corporations. Despite an intense lobbying effort, the measure was ultimately cast aside in late 2011, temporarily yielding to the criticism, in part, that the original such provision enacted under the American Jobs Creation Act of 2004 offered a generous reward for international tax avoidance. Exploiting the timing of twelve prominent proposals, endorsements, criticisms, and rejections, I examine investor valuations of the expected benefits accruing to U.S. multinationals from a reduction in the repatriation tax as a function of firm characteristics, with a special emphasis on those that have elsewhere been shown to facilitate income shifting activity in order to address the question of how large this reward might be. I find that on the most salient of event dates, stock market capitalization among likely dividend-repatriaters rose by nearly $300 billion, consistent with shareholders recognizing very substantial potential tax avoidance benefits from a renewed tax holiday.