Is the extent of profit shifting overstated?

Wednesday March 31, 2021

Last week, the Senate Finance committee consider testimony on “How US International Tax Policy Impacts American Workers, Jobs, and Investment.” The Joint Committee on Taxation set the stage for this hearing with the release of their report “U.S. International Tax Policy:  Overview and Analysis” (JCX-16-21).  The hearing and report cover broad swath of tax policy issues, including the effect of US international tax rules enacted with the Tax Cuts & Jobs Act of 2017.  They are also important precursors to the looming legislative debate over the Biden administration likely proposals intended to increase the tax paid by US multinational corporations among others.  Underlying much of the discussion and debate is the perennial consternation over excessive shifting of profits out of the US and into low or no-tax jurisdiction.   Few doubt the existence of such profit shifting, although there is a healthy debate among academic researchers about the measurement and magnitude of the problem.  UNC Tax Center academic fellows and UNC graduates Jennifer Blouin (Wharton) and Leslie Robinson (Tuck) have written an influential paper on the topic and argue that mismeasurement is significantly overstating the extent that US multinational corporations are avoiding tax through profit shifting.  This seemingly esoteric empirical result has now entered the main stage of the policy discussions on the issue with Jim Hines citing it in his Senate Finance committee testimony last week, and Senator Mike Crapo (R, ID) directly questioning him on the result.  Hines’ point of view was quite clear:  “It has long been clear that many of the estimates of income shifting by multinational firms greatly overstate the extent of the problem.”  Academic papers like this by Drs. Blouin and Robinson are helping to inform how large the problem of income shifting is, and therefore, how aggressively the Biden administration should be in creating legislation to address it.

While this article has had an impact in the tax policy community, as evidenced by its discussion in the hearing, not all tax economists have taken its message to heart. For example, in the The Made In American Tax Plan, Figure 4 is incorrect, given the findings of the paper.