Expected effects of the US tax reform on other countries: global and local survey evidence
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Expected effects of the US tax reform on other countries: global and local survey evidence Dorine Boumans1 · Clemens Fuest1 · Carla Krolage1 · Klaus Wohlrabe1
© The Author(s) 2020
Abstract The Tax Cuts and Jobs Act constitutes the largest change to the US tax system since the 1980s and thoroughly alters the way in which multinational companies are taxed. Current assessments on the reform’s international impact vary widely. This article sheds light on the tax reform’s expected effects on other countries. We first use representative German business survey data to analyze the impact of the reform on German firms. Many firms with substantial US revenues or capacities in the USA intend to expand US investment in response to the reform, in particular large firms and manufacturing companies. The effects on investment in Germany are ambiguous: While some firms substitute between investment locations, others expand in both countries. We subsequently extend our analysis to a global level using worldwide survey data. The results suggest a negative impact on tax revenues and investment in countries with close economic ties to the USA. Keywords US tax reform · Tax Cuts and Jobs Act · Corporate tax · Firm responses · Survey · Germany JEL Classification H25 · H32 · D22 · F23 · E62
* Klaus Wohlrabe [email protected] Dorine Boumans [email protected] Clemens Fuest [email protected] Carla Krolage [email protected] 1
ifo Institute, Munich, Germany
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1 Introduction On December 22, 2017, US President Donald Trump signed into law the Tax Cuts and Jobs Act. This reform constitutes the most substantial overhaul of the US tax system since President Reagan’s 1986 reform and changed both the corporate and the personal income tax. Most notably, the reform reduced the statutory federal corporate income tax rate from 35 to 21 percent and thoroughly changed the taxation of multinational firms. In addition to converting from a worldwide tax system with deferral to a modified territorial tax system, the TCJA introduced new international provisions (BEAT, FDII and GILTI) affecting the taxation of multinational income. With many of the TCJA’s provisions targeting multinationals, the reform does not only have a far-reaching impact in the USA, but around the globe. Beyond the demand stimulus expected from the tax reform, the reform may induce companies to shift investment as well as taxable profits to the USA. However, some provisions may exert countervailing effects and induce investment in other countries. So far, no clear consensus has emerged on the extent of these effects (Kopp et al. 2019). However, when deciding whether and how to design a policy response, the international implications of the TCJA are of utmost importance to policy makers. Against this background, this paper gathers survey evidence to shed light on the reform’s potential international effects on investment, trade and tax revenues. As the TCJA’s economic effects are largely contingent on firm responses to the reform, this paper mainly r
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