Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition

Tao Chen; Chen Lin; Xiang Shao

doi:10.1287/mnsc.2021.4121

Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition

Tao Chen, Chen Lin and Xiang Shao

2022 · Published in Management Science 68(8): 6145–6162 · DOI 10.1287/mnsc.2021.4121

PDF of Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition (Accepted manuscript, November 2020)

In one sentence

U.S. manufacturers facing more competition from Chinese imports increase their tax-reduction activities.

Summary

The paper studies how globalisation affects the tax policies of U.S. manufacturing firms, using the U.S. grant of Permanent Normal Trade Relations to China as a quasi-natural experiment. Firms with greater exposure to Chinese imports significantly increase tax-reduction activities, especially firms with more managerial slack, less diversified product markets and faster-changing industries. Exposed firms are also more likely to acquire subsidiaries in low-tax regions and to show signs of transfer pricing. Tax-reduction activity falls after the 2017 U.S. tax cut and after tariffs on Chinese imports rise.

Abstract as published

This paper studies how globalization affects the corporate tax policies of U.S. manufacturing firms. Using U.S.-granting China Permanent Normal Trade Relations as a quasi-natural experiment, we find a significant increase in tax reduction activities for firms facing higher exposure to Chinese imports. The effect is more pronounced for firms with higher managerial slack. We also find that the effect is stronger for firms in less diversified products market and faster changing industries. We also show that U.S. firms facing higher Chinese import competition are more likely to engage in other tax-motivated activities: acquisition of subsidiaries in low-tax regions and suspected transfer pricing. Furthermore, we explore the 2017 tax cut and the recent U.S.-China trade dispute and find that firms engage less in tax reduction activities after the 2017 tax cut and after the tariff increase for Chinese imports.

Citation

Tao Chen, Chen Lin, Xiang Shao (2022). Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition. Management Science, 68(8), 6145–6162. https://doi.org/10.1287/mnsc.2021.4121

BibTeX

@article{chen2022globalization,
  title = {{Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition}},
  author = {Tao Chen and Chen Lin and Xiang Shao},
  journal = {Management Science},
  year = {2022},
  volume = {68},
  number = {8},
  pages = {6145--6162},
  doi = {10.1287/mnsc.2021.4121}
}