The Real Effects of US Tax Arbitrage by Foreign Multinational Firms

Using confidential microdata, I document that foreign multinational firms' income shifting out of the United States is positively associated with their real economic activity in the US. When these firms face greater restrictions on income shifting – resulting from the staggered implementation of 16 “Controlled Foreign Corporation” laws abroad – they scale back US employment and investment, and are less likely to establish US operations. Given the large role of foreign-owned businesses in the American economy, the findings highlight the exposure of US economic activity to regulatory changes abroad. Foreign direct investment plays a key role in transmitting policy across borders