Juan Carlos Suárez Serrato, Duke University

Unintended Consequences of Eliminating Tax Havens

Abstract

Do tax havens reduce domestic economic activity? This paper explores the effects of unilateral efforts to combat profit shifting on domestic investment and employment. We develop a model of multinational investment that shows profit shifting generates tax complementarities between tax havens and high tax countries. We then analyze the effects of the repeal of Section 936 of the Internal Revenue code as a natural experiment that limited profit shifting activities for US multinationals with operations in Puerto Rico. Using data from the Annual Survey of Manufacturers, we show that industries that were more exposed to § 936 reduced investment in the US.

We then use Compustat data to show exposed firms shifted investment to foreign affiliates. These investment responses had large effects on local labor markets. We create a measure of exposure to § 936 for each local labor market that exploits the establishment networks of US multinationals. We find that labor markets with a greater exposure experienced a decline in employment and income growth that persisted even after the phase-out of § 936. These results show that unilateral efforts to combat profit shifting may have large unintended consequences on domestic economic growth.

Juan Carlos Suárez Serrato received his PhD in Economics from UC Berkley, and worked as a Postdoctoral Fellow at the Stanford Institute for Economic Policy Research. He is currently an Assistant Professor of Economics at Duke University and a Faculty Research Fellow at the National Bureau of Economic Research. His work covers topics such as public finance, government spending and corporate taxation.