Friday, February 27, 2009
Dhammika Dharmapala (University of Connecticut, Department of Economics; moving to Illinois),C. Fritz Foley (Harvard Business School) & Kristin J. Forbes (MIT, Sloan School of Management) have posted The Unintended Consequences of the Homeland Investment Act: Implications for Financial Constraints, Governance, and International Tax Policy on SSRN. Here is the abstract:
The Homeland Investment Act of 2004 provided for a one-time tax holiday on the repatriation of foreign earnings, thereby allowing U.S. multinationals to access earnings retained abroad at a lower cost. Firms responded to this act by significantly increasing repatriations from foreign affiliates. This paper analyzes the impact of the tax holiday on firm behavior. It controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in investment, employment or R&D-even for the firms that lobbied for the tax holiday stating these intentions. Instead, a $1 increase in repatriations was associated with an increase of approximately $1 in payouts to shareholders. These responses are consistent with the view that the domestic operations of U.S. multinationals were not financially constrained and that U.S. multinationals are reasonably well-governed. The results also have significant implications for understanding the impact of the U.S. corporate tax system on the behavior of multinational firms.