The Consequences of the 2017 Us International Tax Reform : A Conceptual Framework for Welfare Analysis

The 2017 US tax legislation - widely referred to as the Tax Cut and Jobs Act (TCJA) - fundamentally transformed the US system of international taxation, introducing for instance a new tax on “Global Intangible Low-Taxed Income” (GILTI). This paper develops a simple conceptual framework that extends the theory of multinational corporations’ (MNCs’) responses to taxation. The model focuses on the efficiency costs of ownership distortions in analyzing the impact of the GILTI tax and the prior repatriation tax on foreign acquisitions by US MNCs. The paper derives a set of sufficient conditions under which changes in US MNCs’ foreign activity in response to the TCJA imply an unambiguous reduction in both US national welfare and global welfare. Drawing on the emerging empirical literature on the impact of the TCJA, the paper documents that the TCJA led to a general decline in US MNCs’ foreign acquisitions, while increasing US MNCs’ investment in routine foreign tangible assets. These two findings correspond closely to the model’s sufficient conditions for an unambiguous decline in US and global welfare. Other findings in the empirical literature – on profit shifting, stock market reactions, and US investment and wages - provide additional support for this conclusion. An illustrative calculation based on the magnitude of the first effect suggests that the TCJA nearly doubled the synergy losses associated with US taxation of US MNCs’ foreign activity