Barry Presents Tax And The Boundaries Of The Firm Today At Pepperdine

Jordan Barry (USC; Google Scholar) presents Tax and the Boundaries of the Firm (with Victor Fleischer (UC-Irvine; Google Scholar); reviewed by Tracey Roberts (Cumberland; Google Scholar) here) at Pepperdine today as part of its Tax Policy Workshop Series hosted by Deanna Newton:

One of the most fundamental questions of economics is how firms decide what to produce themselves (“make”) and what to purchase from other firms (“buy”). We analyze how income taxes distort firms’ decisions along this and related dimensions. Three main effects emerge.

First, intrafirm transactions allow firms to reduce their tax burdens, such as by shifting their income to lower-tax jurisdictions. This effect is inherent to an income tax. It makes firms bigger, encouraging them to “make” more and “buy” less. Second, implementing an income tax entails enacting many additional rules, none of which is inherent to an income tax. Many of these rules affect the boundary of the firm. Some expand it; others contract it. However, these expansions and contractions generally operate along different dimensions, and thus do not offset each other. Finally, income taxes encourage regulatory arbitrage transactions, which enable firms to achieve their desired tax treatment without changing the economic boundary of the firm. These transactions preserve the boundary of the firm, but also create complexity, opacity, and inefficiency.

Our analysis provides insight into many important and timely tax policy questions, including the relative value of corporate income taxes and VATs, the merits of the Tax Cuts and Jobs Act of 2017, and the OECD’s ongoing Base Erosion and Profit Shifting Project.