Unintended Consequences of Eliminating Tax Havens: Shifting investment abroad, reducing domestic employment

Unintended Consequences of Eliminating Tax Havens. Juan Carlos Suárez Serrato. NBER Working Paper No. 24850, July 2018. www.nber.org/papers/w24850

JEL No. F23,H25,H26,H32,J23

ABSTRACT: We show that eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of  investing in the US. Exposed firms respond by reducing global  investment and  shifting investment abroad — which lowered their domestic investment by 38% — and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. We discuss implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.