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• Article | National Tax Journal | December, 2011

  Tax Policy and the Efficiency of U.S. Direct Investment Abroad

  Mihir A. Desai, C. Fritz Foley and James R. Hines Jr.

  Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982 to 2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950 to 2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160% of net investments, implying that foreign investment over these periods was dynamically efficient.

  Keywords: Policy; Taxation; Performance Efficiency; Foreign Direct Investment; Investment Funds; Investment Return; Business Earnings; Equity; Financing and Loans; Cash Flow; Capital; United States;

  Citation:

  Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr. "Tax Policy and the Efficiency of U.S. Direct Investment Abroad." National Tax Journal 64 (December, 2011): 1055–1082.

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• Article | Harvard Business Review | July–August 2012

  A Better Way to Tax U.S. Businesses

  Mihir Desai

  The article argues that U.S. taxation reform should reduce corporate taxes, incorporate an awareness of the global marketplace, and generate revenue-neutral incentives for innovation. According to the article, a reduction in corporate tax rates would be offset by a tax on noncorporate business income and an expansion of taxable income. Topics include tax-avoidance techniques, globalization, repatriation taxes, corporate social responsibility, and U.S. workers. Graphs are included, which compare the U.S. tax rate with other countries.

  Citation:

  Desai, Mihir. "A Better Way to Tax U.S. Businesses." Harvard Business Review 90, nos. 7-8 (July–August 2012): 135–139.

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• Working Paper | 2012

  Trade Credit and Taxes

  Mihir Desai, C. Fritz Foley and James R. Hines Jr.

  This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: 10% lower local tax rates are associated with net trade credit positions that are 1.4% higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.

  Keywords: Trade; Capital; Taxation; Resource Allocation; Credit; Multinational Firms and Management; United States;

  Citation:

  Desai, Mihir, C. Fritz Foley, and James R. Hines Jr. "Trade Credit and Taxes." NBER Working Paper Series, No. 18107, May 2012.

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