International Taxation and the International Trade of Multinational Firms : Project Abstract

This project investigates the relationship between the international taxation of corporate income and the international trade of multinational firms. About 40 percent of all U.S. international trade is intrafirm trade, or international trade that occurs between two affiliates of a multinational firm. Preliminary evidence suggests that multinational firms alter the prices on their intrafirm trade transactions in order to minimize their worldwide tax burden. The first goal of the project is to examine the magnitude of such income shifting, analyzing the pattern of such behavior in different industries. The empirical analysis considers the relationship between intrafirm trade prices and the tax rate of the partner country, employing detailed data on intrafirm trade prices from the Bureau of Labor Statistics. The second goal of the project is to consider the consequences of this behavior for (a) the volumes of U.S. international trade with different countries and (b) U.S. federal government revenue collections. This analysis relies in part on data from the Bureau of Economic Analysis on the operations of U.S. multinational firms. Third, this work considers an alternative international taxation system, formula apportionment. Under this system, U.S. multinational firms would be taxed based on the share of their worldwide activity (measured by sales, payroll, or assets) located in the United States, rather than based on the income they incur in the United States. The revenue consequences of this system are explored.

This research is informative for those scholars and policy makers who are interested in tax policy as well as those interested in trade patterns. For example, the extent to which multinational firms avoid taxation by shifting their income to low-tax countries affects our assessment of the fairness and efficiency of the current international tax system. By directly comparing the current system with an alternative, formula apportionment, more can be learned about the costs and benefits of these two options. Further, the tax minimizing behavior of multinational firms also affects the pattern of U.S. international trade in ways that trade economists have neglected.