The Influence of Macroeconomic Growth Opportunities on U.S. Effective Tax Rates on Foreign Earnings

This study examines whether U.S. effective tax rates on foreign income of U.S. multinationals (MNCs) vary according to the favorability of U.S. macroeconomic conditions relative to those of non-U.S. countries. We use the pre-Tax Cuts and Jobs Act of 2017 regime as our setting and present evidence that U.S. effective tax rates on foreign earnings are higher (lower) in periods when macroeconomic conditions in the U.S. are favorable (unfavorable) relative to those elsewhere in the world. These results imply that firms seek to maximize after-tax returns when making asset allocation decisions, even when faced with U.S. repatriation tax costs. We provide further evidence indicating that our primary results vary predictably according to certain firm characteristics, namely the ability to acquire funds for investment through less expensive means than repatriation of foreign profits, high intangible asset intensity, and tax aggressiveness. Finally, we show that economic uncertainty in the U.S. counters the positive effects of favorable U.S. macroeconomic conditions on U.S. effective tax rates on foreign earnings. Our findings have implications for the policy debate around the U.S. taxation of foreign earnings and provide a (partial) explanation for the observed lower-than-expected levels of repatriation activity following the implementation of the Tax Cuts and Jobs Act of 2017