Implicit Taxes of U.S. Domestic and Multinational Firms During the Past Quarter-Century

Abstract

Recent research by Dyreng et al (2014) finds that the effective tax rates for both foreign and domestic firms have been steadily decreasing over recent decades and that multinational firms (MNEs) do not have a tax-based cost advantage relative to their domestic counterparts. This paper extends this research and examines implicit taxes for MNEs. We use the approach outlined by Jennings et al. (2012) and find that for both domestic and multinational firms, lower effective tax rates are only partially offset by implicit taxes. Further, we find that implicit taxes for MNEs are lower than domestic firms and have fallen over time, while implicit taxes on domestic firms have been rising. We also find that differences in implicit taxes between domestic and MNE firms widen when MNE firms derive a larger portion of their pretax income from foreign sources. Our results underscore the contention in Shackelford and Shevlin (2001) that measuring differences in explicit tax burdens without implicit taxes may lead to incomplete findings.