Faculty of Business Seminar Series/ O. Erem Ataşağaoğlu

Title: Technology Capital and the Taxation of Multinational Corporations

Abstract: The US has the highest corporate tax rate among advanced economies and it uses a worldwide tax system, i.e. it taxes the profits created by its corporations on foreign soil. This paper evaluates the costs and benefits of switching from the ‘worldwide’ to a ‘territorial’ system and investigates the effects of a reduction in US corporate tax rates under each system. We build a multicountry general equilibrium model with multinational firrms, heterogeneous households and incomplete markets. Multinationals invest in tangible, intangible and technology capital. The technology capital is accumulated only at the home but used in all foreign subsidiaries. We find that reducing corporate taxes under the current worldwide system stimulates investment by US multinationals both at home and abroad, but these effects are mitigated by a reduction in investment by foreign multinationals. In particular, the FDI in the US is crowded out due to tougher competition. If the US tax rate is reduced below the foreign tax rate, a further mitigating factor is that investment in technology capital by US firms declines. Intuitively, technology investment is deducted from taxable profits at home and generates returns both home and abroad, with the returns abroad taxed at a different rate. A US tax cut raises the marginal cost of technology investment by more than the marginal benefit since the tax on the foreign return remains unchanged. This negative effect becomes even more relevant if US switches to a territorial system, since it kicks in even at the current high level of US taxes. Switching to territorial system increases US FDI abroad, but it also leads to a reduction in FDI by the foreign firms in the US. We find that these mitigating effects lead to lower welfare, showing that any tax reform should not target only the domestic corporations, but also the incentives that it provides to foreign corporations.

Place: Meeting Room AB2-345