Domestic Institutions and the Taxing of Multinational Corporations

Authors

Errata

This article is corrected by:

  1. Errata: Retraction Volume 58, Issue 1, 225, Article first published online: 19 March 2014

  •  The statistical analysis of firm-level data on foreign-owned US affiliates was conducted at the Bureau of Economic Analysis, US Department of Commerce, under arrangements that maintain legal confidentiality requirements. The views expressed in this paper are those of the author and do not necessarily reflect official positions of the US Department of Commerce. David Klein provided excellent research assistance. Thanks to Tim Büthe, Alison Christians, Mark Copelovitch, Henrik Enderlein, Glen Hoetjer, Patrick Leblond, Quan Li, Matt Gabel, Eddy Malesky, Ray Mataloni, Kevin Morrison, David Patel, Tom Pepinsky, Pablo Pinto, Dennis Quinn, Andy Sobel, Maria Sperandei, Markus Stierli, Randy Stone, Stefanie Walter, Chris Way, Jason Yackee, and participants at numerous conferences and workshops. Matthew Walsh provided excellent research assistance. Funding for this project was provided by the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis.

Abstract

Jensen, Nathan M. (2013) Domestic Institutions and the Taxing of Multinational Corporations. International Studies Quarterly, doi: 10.1111/isqu.12015
© 2013 International Studies Association

Political scientists have examined how domestic politics and the competition for international capital affect the setting of national tax rates. In this paper, I explore how political institutions, specifically the level of democracy, affect firm-level taxation across the world. I argue that electoral competition leads democratic governments to higher levels of taxation on firms. Using a data set on firm tax payments on the foreign affiliates of US multinational corporations from the US Bureau of Economic Analysis, I show that there are large variations within countries on the tax burdens faced by firms that are not explained by national tax rates. I find evidence that the mobility of the specific investment project, the types of spillovers these investments provide to a community, and attributes of the parent firm are all important determinants of taxation. While firm-level factors clearly affect corporate taxation, I argue that democratic institutions limit the offering of tax incentives and generate electoral benefits to policing tax avoidance by multinational corporations. After controlling for parent firm and foreign affiliate–level factors, I find that democratic countries generate as much as 26% more tax revenues from multinational corporations relative to authoritarian countries.

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