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Review of Economic Studies (2022) 0, 1–36 https://doi.org/10.1093/restud/rdac049 © The Author(s) 2022. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. Advance access publication 26 July 2022
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The Missing Profits of Nations THOMAS TØRSLØV Danmarks Nationalbank
LUDVIG WIER Danish Ministry of Finance
and GABRIEL ZUCMAN UC Berkeley and NBER First version received April 2020; Editorial decision March 2022; Accepted July 2022 (Eds.) By exploiting new macroeconomic data known as foreign affiliates statistics, we show that affiliates of foreign multinational firms are an order of magnitude more profitable than local firms in a number of low-tax countries. Leveraging this differential profitability, we estimate that 36% of multinational profits are shifted to tax havens globally. US multinationals shift twice as much profit as other multinationals relative to the size of their foreign earnings. We analyse how the location of corporate profits would change if shifted profits were reallocated to their source countries. Domestic profits would increase by about 20% in high-tax European Union countries, 10% in the US, and 5% in developing countries, while they would fall by 55% in tax havens. We provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting. In contrast to the picture painted by official statistics, our results suggest that the corporate capital share has increased not only in North America but also in high-tax European countries. Capital is making a comeback globally, but its rise is obscured by the tax avoidance strategies of multinational companies. Key words: Multinationals, Profit shifting, Factor shares JEL Codes: H26, E25, F23
1. INTRODUCTION One of the most striking development in global tax policy since the 1980s has been the decline in corporate income tax rates. Between 1985 and 2018, the global average statutory corporate tax rate fell by about half, from 49% to 24%. One reason for this decline is international tax competition. By cutting their tax rates, countries can attract profits and capital from abroad (see Keen and Konrad, 2013, for a survey). Yet, despite the prominence of profit shifting in the academic literature and the public debate, we do not currently have comprehensive estimates of the amount of profit shifted from one country to another. Our article attempts to fill this gap by drawing on new data. Since the beginning of the 2010s, the statistical institutes of most developed countries—including the major tax havens— have started releasing macroeconomic data known as foreign affiliates statistics. Following international guidelines, these data record the wages and profits of foreign firms, defined as The editor in charge of this paper was Thomas Chaney. 1
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