The Effect of the Tax Cuts and Jobs Act on Foreign Investment of U.S. Multinational Corporations
61 Pages Posted: 28 Oct 2022 Last revised: 16 Feb 2024
Date Written: October 22, 2022
Abstract
This study examines the effect of the 2017 Tax Cuts and Jobs Act (TCJA) on capital investment, labor investment, and the productivity of foreign subsidiaries of U.S. multinational corporations (MNCs). Proponents of the TCJA argue it would decrease foreign investment by leveling the playing field between U.S. MNCs and foreign-owned corporations. However, policymakers are currently debating international tax reform, arguing that the TCJA incentivizes foreign investment. My study informs this debate by providing empirical evidence on the TCJA's effect on foreign investment and productivity. Using a difference-in-differences design, I find that after the TCJA, U.S.-owned foreign subsidiaries invest 13.1% less in capital and 1.3% less in labor relative to subsidiaries owned by non-U.S. MNCs. I also find these reductions are positively associated with subsidiary-level productivity, suggesting that the TCJA alleviates inefficiencies of the previous tax regime.
Keywords: tax reform, Tax Cuts and Jobs Act (TCJA), international taxation, investment, productivity
JEL Classification: H25, F23, G31, D24
Suggested Citation: Suggested Citation