A0504
Title: Profit shifting and firm growth
Authors: Sepideh Raei - Utah State University (United States) [presenting]
Abstract: The consequences of profit shifting for firm growth are analyzed. Using French firm-level administrative data, it is shown that firms that open their first subsidiary in a tax haven have lower growth rates of employment, turnover, and assets relative to similar firms that open a subsidiary either domestically or in another high-tax location. Similar trends are shown globally using the firm-level balance sheet data. A novel firm dynamic model is built with multi-establishment firms to explain the mechanism driving this empirical observation. In the model, firms choose to expand their operations by either growing the size of each of their establishments or by opening a new establishment in domestic, high-tax, and low-tax locations. The model is used to show that tax planning incentives result in firms opting to be multinationals and having fewer and smaller establishments. This results in lower levels of output and employment. Findings suggest that when firms prioritize minimizing their tax bill, they may forgo a higher level of output and employment.
