Corporate income tax rates in Nash equilibrium

This is from the job market paper of Yang Shen, a candidate at Brown University:

I calibrate a three-country version of the model to data on trade, MP, and corporate tax rates for Germany, Ireland, and the United States. I then compute the Nash equilibrium corporate tax rates and calculate the associated welfare changes. The United States would undertake the largest tax cut in the Nash equilibrium, in an attempt to widen market entry of marginal firms. All three countries would experience welfare gains under the Nash tax rates.

In her model, the United States should cut its corporate tax rate by eleven percentage points.  Shout it from the rooftops, as they say…


From the abstract: "The last two decades have witnessed worldwide corporate tax cuts. Countries that experienced the largest reduction in tax rates, such as Ireland, have become MNEs’ [multinational enterprises] favorite production locations." Ireland is a tax haven, domestic production not anywhere near the reported income. The problem with this paper, the problem with almost all papers that rely on historic trade data, is that trade today, and the reasons MNEs "locate" in a particular country (whether they locate production facilities or locate reporting income), are far different than in times' past. Shout it from the rooftops, as they say.

+1 ....(gnashing of teeth)

So money routes around inefficiency as well.

Note to Anon, As needed desean jackson

My former software company runs its global operations out of Dublin where they have about 2500 employees out of 15k. If they ran global ops somewhere else they’d likely have fewer than 100.

I stand for the flag.

I kneel at the cross.

Any questions?

I get all my news from the most authoritative and diverse source, and it clearly proves you're an idiot.

You probably don't even use a Mac you mouth breather.

And, the EU would counteract by raising tariff and non-tariff barriers, and US multinationals with operations in both the EU and US would simply find ways to declare the income in the US as opposed to the EU. Maybe move some patents or trademarks around.

Just imagine if every company could pay the corporate tax rate that Apple did in Ireland - 0.005% in 2014. Though Apple was too stupid to go double Irish, and ended up getting hammered - 'To understand this, a bit of background is necessary. US multinationals here have typically used Irish-registered subsidiaries to take in the revenue from sales across Europe – and beyond in some cases. They have done this in a way which has sheltered much of this income from Irish corporation tax. Apple achieved this in a way that was slightly different to most of the other big tech players who have established here, even though the outcome was very similar.

Central to most of these structures – though not Apple’s – was the “double Irish”, the rule that allowed multinationals to register companies in Ireland but have them resident for tax purposes elsewhere. The double Irish is being phased out by 2020.

Most multinationals worked the double Irish like this. They established one company registered in Ireland but tax resident elsewhere, often in a tax haven such as the Bahamas or Cayman Islands. This company “owned” the intellectual property (IP) rights for sales in Europe. In other words, it had an asset which represented all the research, development and marketing work done on whatever product was involved.

Typically, the multinational then had a second Irish company which took in the revenue from across Europe. This second company paid the first one a charge for the use of the IP . This charge usually represented a significant portion of revenue and so the profits declared by the second company – the one tax resident here – were typically low and most of the cash ended up in the company which was tax resident offshore.

This then left the US multinational with a pot of money sitting in a company tax resident offshore.'

Where are the deficit hawks in this $1.5 trillion tax proposal?

Are they now the deficit chickens?

Or are they the deficit foxes who will be coming after your SS and Medicare, claiming later that the sky is falling.

There's definitely a valid debate about the cost of this reform but I think Democrats are very ill equipped to try to make this a deficit issue... I mean, you guys spent 6 billion dollars with cash for clunkers...

Yeah, 48% of the cut goes to the top 1% and 38% to the top .1% according to the Financial Times.

Now, that's a real clunker.

Hey, all you folks making less than $75k, and all you students,

Look under the Christmas Tree,

You just got a Clunker.

But, I got a Christmas present,


Will break out in my Happy Dance.

Merry Christmas. (I don't have to say Happy Holidays anymore!)

Dog’s barking sir, on the parterre, and Van Gogh painted rocks ma’am, and the mica, the fucking specious flow of mica on those poor coral tiles, children taken from a life in the sea where surely they may have preferred. Men in three pieced suits heckled effeminate and consumption’s fool, licking their transparent fingers.


I will not speak in tongues as you do, but I will say, that after this tax bill passes, and after I feast on the tax cuts you have given me, I can only say one word: Burp.

I want to thank you for your Christmas present.

Actually cash for clunkers only cost $3B. The net cost was even less, just $1.4B (that's when you take the $3B actually paid and net against it various positives like the lower amount of gas Americans needed to buy due to the program) at a time of zero percent interest rates and mass unemployment.

In contrast we are talking here about $1500B in cost. Just saying.

Math! No true Republican!

Now, there is a big difference between a tax cut and an outright spending program like cash for clunkers. Falling revenues only matter because we spend too much in the first place...

Where Republicans are indeed to blame is in failing to cut spending. That is the true shame.

The line between a tax cut and spending is pretty blurry. For example, I could cast 'cash for clunkers' as a $1200 tax cut for anyone who traded in a low MPG car for a high one. I could recast the Obamacare mandate as a $600 tax cut for anyone who has health insurance.

This is why government spending in terms of economics is restricted to the actual purchase of goods and services by the government. Buying a tank, that's spending. Mailing an old person a social security check, that's a transfer payment but not strictly spending because the actual spending happens not by the government but by the things the person who gets the check wants to buy.

Here is some shocking mathematics:

If spending is as low as it can go, politically speaking, then taxes should be at about the same level.

Or a squidge higher, to allow for the sort of discretionary spending that Tyler would like to see for Science and Technology Innovation.

(Android does weird capitalization on speech to text.)

The only argument here is that, if the money is repatriated, at least SOME taxes would be paid. As it stands, there is no incentive to bring the money back, and a corporation that did so at current rates might ruffle the feathers of activist investors or plaintiffs' attorneys representing aggrieved stockholders.

On the other hand, the idea that repatriation would spur domestic investment doesn't make sense either. Offshore money can be pledged as collateral for bonds or bank loans, cheap financing that is broadly available already.

The 'repatriation' seems like an accounting illusion. Say a corporation is keeping $1B in profits in their Irish bank account because to 'repatriate' it would incur a big tax bill. But the Irish bank is free to lend money or make investments with the funds on deposit. If there's demand and opportunity for some investment in the US that beats out anything else, the bank will lend there. If the corporation turns around and takes the money out of the Irish bank, then it's back in America but now the Irish bank won't be lending in America because deposits have fallen.

I suspect this is just a political budget game, not unlike the idea of killing 401K's in favor of Roth IRA's. Roth IRA's mean you pay taxes on contributions today but not withdrawals tomorrow...401K is the reverse. Get rid of 401K's and you'll have a surge of tax revenue today *but* tomorrow you'll see a decline since people won't pay on their withdrawals. The repatriation thing seems to me like a scam to score some fast tax revenue before Trump gets impeached to make it look like he has accomplished some sort of miracle leaving whoever comes after to take the blame for the flip side of the coin.

And why are you assuming the Irish bank is going to invest in the US instead of the rest of the world?

Let's say there's a better investment opportunity in Germany. The US company would simply take their funds in the Irish bank and invest in Germany, no repatriation would happen then regardless of the tax code. This only matters in the case where the marginally next best investment happens to be in the US.

Why assume Apple is going to invest repatriated funds in the US rather than somewhere else?

We don't. If Apple wanted to use those funds in Ireland or Europe it could do so now without any US tax problems. This is a problem that would only exist at the margin....Apple has some worthwhile thing to do in the US but it's not so great that it's worth paying the tax penalty so it doesn't do it. In that case resolving the tax penalty issue would marginally add some spending in the US economy...presumably.

OK. That makes sense.

"Offshore money can be pledged as collateral for bonds or bank loans, cheap financing that is broadly available already."

Not true if for use in the United States. See section 956 and specifically section 956(a) and (d).

Also see Treas. Reg. Section 1.956-2(c) and specific examples regarding indirect guarantees and pledges and "conduit financing arrangements".

Fair enough; I'm not a lawyer. As a practical matter, however, do you believe that Amgen and Gilead -- with $65 billion in offshore cash between them -- could not devise more efficient ways to fund projects, here or elsewhere, without paying 40 percent (federal and state) rates?

"I'm not a lawyer". But you sounded so certain and unequivocal. Not that you have to be a lawyer, and I don't mean to pick on you especially, but one of my pet peaves is that people here (not especially here, but here, also) are so quick to throw out uninformed statements *as if they are "fact"*. Outside the world of blogging and commenting on blogs, one can be sued for that. That's something a lawyer or a doctor learns fairly quickly. Not so much economists, it seems (not that you are necessarily one of those, either, but you get my drift). Topic for possible discussion---a case for licensing?

I'm not quite sure what your question is, but maybe it is whether there is some way to effectively get around section 956 and the limits it imposes. If you have a fail-safe method, then maybe you should be a lawyer. There's a market for good ideas! If there were an easy way, I'm sure the US multinationals would not be qwetching so much.

Are there ways around 956 for a company? Yes they can borrow on their general financial strength or issue stocks on the same instead of simply having their money overseas wired home. Is that as inexpensive as simply having the ability to move money back and forth with no tax if the money was sitting in another US state? No.

More important does the US economy find a way around 956? Clearly yes, money can be loaned by any bank or investor to the US. The cost here is clearly much less since the only inefficiency is that perhaps the most ideal candidate to do a particular project may not be the one to get the loan.

BTW, why couldn't the Irish subsidy borrow based on their locked up profits and then invest in the US as a *foreign entity* rather than lending it to the parent company?

Nonetheless that wouldn't stop an Irish bank from making a loan to the US division if they had a good investment idea. Nor would it stop the US company from issuing stock to raise the funds needed for the investment (and investors, no doubt, would consider the profits sitting in an Irish bank as a potential asset that would make owning the stock worthwhile).

As I pointed out in an earlier thread on this topic, due to section 956, etc., the US operations of a US multinational with substantial non-repatriated overseas earnings and profits is pretty much on the same footing as regards loans from that Irish bank as anyone else in the world. The Irish bank (or any other bank where that money may sit) is free to use those funds to make loans to anyone else---even the US company's competitors! As for issuance of stock, I'm not sure that having a substantial amount of largely dormant cash subject to a substantial deferred tax liability-- even if (or especially) if not on the books-- is a particularly compelling reason to invest in that company.

If some other investment idea is better than the one the US Company wants to do, then that's where a rational market will send the funds whether it's a bank making a loan or the company itself repatriating their funds and deploying them .

As for issuance of stock, I’m not sure that having a substantial amount of largely dormant cash subject to a substantial deferred tax liability– even if (or especially) if not on the books– is a particularly compelling reason to invest in that company.

Company A and B are exactly the same in terms of assets, liabilities, profits etc. Except company A happens to have $1B sitting in an Irish bank, yes there would be a tax hit if they had to bring that into the US but nonetheless they have access to it. Company B has no such cash horde.

There is absolutely no reason company B's stock price wouldn't be higher to reflect the potential value of that asset. When you apply for a mortgage, mortgage companies often ask to see a copy of your 401K statement and will give you a slightly better rate if you happen to have a healthy 401k...even though there is no easy way to tap your 401K to pay your mortgage without taking a huge tax hit.

"There is absolutely no reason that Company B's stock price wouldn't be higher to reflect the potential value of that asset".

Perhaps inadvertently, you've finally made a comment that makes sense. If A and B have exactly the same amount of assets and liabilities, except A's assets include $1 billion in cash, then quite likely B is indeed a better investment (there are, of course, always other variables to consider). The reason one invests in companies is not for their cash, but for the ways they have invested that cash to produce a higher rate of return than cash affords. There is generally no investment premium for cash. If it were otherwise, I would think you'd be better off investing in a money market fund or a bond fund. After all, those funds are not blocked offshore and are not subject to a deferred tax liability.

Let's rephrase that a bit. A and B are exactly the same in terms of assets, liabilities, profits etc. They are the same in terms of skill, in terms of expectations for their future products, etc. The one difference is A has $1B sitting in a foreign bank account which it cannot repatriate without incurring a tax cost and B has nothing.

Clearly in that case company A should command the greater valuation because it literally has greater assets than company B.

Let's say there is some investment idea that would produce a great return, better than any other idea that companies A or B could execute. Let's also assume this idea is not something that could be easily executed by any other company due to the special expertise A and B have.

Could company A borrow $1B? Yes
Could company B borrow $1B? Yes

- In that case even though company A is not pledging its foreign bank account as collateral, it does have an edge since it literally has more assets than B.

Could company A or B issue stock to raise $1B? Yes

- In that case A has an edge because again it has $1B more in assets than B.

If you make it even harder and assume that *only* company A has the expertise to execute this investment idea, you see it still happens even though company A never touches their $1B.


1. In terms of the US economy there is no repatriation problem. Worthy investment gets funded even if the only companies that can execute it are ones with foreign profits 'locked up'.

2. The finance system has numerous ways to ensure funds make their way to the best possible investment(s).

3. Firms that have a better previous track record (company A and B were exactly alike except A pulled off $1B in foreign profits whereas B did not), receive a market edge when competing for financing whether by taking on debt or issuing equity.

So, you posit an example in which one company has $1 billion more in assets than another. Brilliant analysis!

The appropriate example is this:

Would a US multinational (Apple or any other) be better or worse off without the restrictions of our global system of taxation as opposed to a territorial system that almost all other countries in the world use? That's the issue.

So, you posit an example in which one company has $1 billion more in assets than another. Brilliant analysis!

We are being sold a story where having $1B more supposedly doesn't matter because it is somehow 'locked up' overseas and unavailable in the US.

Would a US multinational (Apple or any other) be better or worse off without the restrictions of our global system of taxation as opposed to a territorial system that almost all other countries in the world use? That’s the issue.

Of course they would be better off, but is this a drag on the US economy? I don't think so. Don't get me wrong, the fact that company A can't easily get at the $1B in Ireland the way it could if the $1B was in another US state does inhibit it somewhat, going around the block by borrowing money or issuing stock does incur some frictional cost to the middlemen in the finance system. Given that companies like Apple have grown to huge monopoly like structures, the friction that comes from foreign assets seems pretty minor.

And that leads me to question if this urgency is minor, should we be indulging an accounting gimmick where the Trump administration will use a surge in tax revenue today offset by future lost tax revenue to pretend their plan is less costly than it really is.

Starve the beast! Let's hope that they're deficit foxes who will cut, cut, and cut entitlements..
"note that they do not analyze the deficit-increasing tax bill on display, but rather something else: Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz, and John. B. Taylor: HOW TAX REFORM WILL LIFT THE ECONOMY"

Definitely, do the corp tax cuts (& holiday), and raise the highest non-pass through individual rates to make up the difference, as well as rejecting all other individual code changes, which are, at best, utterly pointless, and in reality, destructive.

I wonder why the equilibrium rates are not zero.

Rather a good question. Maybe that is excluded by some feature of the model.

Since I'm not hiring I'm not reading further.

I would somebody somewhere someday to study if a cut in taxes on labor would stimulate the economy....

Ray Lopez is gone. This is unfortunate. I would like to hear what he would say on this.

Radical thought. What would happen if the US turned to 100% deficit financing? Hear it out, ultimately the Fed creates enough new money to keep prices from falling but not enough to generate inflation. Why, then, are taxes needed? Presumably the massive decline in taxes would be highly stimulative to the economy but if the Fed then pulled back on money creation that would check inflation. Long term interest rates would be the check on government spending since they would measure the crowding out impact on real output of government spending.

No problem: Ricardian Equivalence.

Nope, we aren't doing 100% deficits today followed by taxes to pay off the debt tomorrow. I'm asking what if we did 100% deficits from here on out. Consumers would not price in a future tax hike, on the other hand investors in Treasury bonds would not assume a future tax hike to pay off their bonds.

I'd like to see more discussion of monetary offsets here. What level of wage inflation does this model imply, what would happen to trade balances (and thus currency values), and what would the likely fed response be?

Corporate tax cuts may increas welfare, but so would mailing everyone a $1000 check. The main question imo is whether corporate tax cuts increase welfare MORE than individual tax cuts. If we want gains in welfare through tax cuts, our default position should be individual tax cuts. They offer a more broad based (fairer) distribution, and would have more immediate effects on demand. Is there a particular reason why conservatives favor corporate tax cuts over individual tax cuts?

" Is there a particular reason why conservatives favor corporate tax cuts over individual tax cuts?"

Corporations have a far higher percentage of positive ROI investment than individuals. Furthermore, corporations are tending to move their headquarters away from the US and to restructure their business operations in sub-optimal ways due to US high corporate tax rates. The drop in US corporate tax rates will, at the very least, decrease the pressure on business moving over seas to avoid high taxes.

Not getting that idea at all. If you gave everyone $1000 tomorrow they will either spend it or stick it in the bank. If they stick it in the bank, that's a corporation so there's your high ROI. If they spend it almost all spending is for goods and services produce so there again corporate profits go up providing more funds for that high ROI investments you want.

Corporations in the US pay, on average, 13% and not the 35% they should be paying. Lowering the sticker rate from 35% to 20% without closing many loopholes, which is what the Republicans are doing, will blow a hole in the federal budget. Corps may end paying less than 10% in taxes. This will be continuing the trend of shifting the tax burden from corps to individuals that has been ongoing since the 50s. I would have no problem with this if everyone was benefiting from the cuts to corp taxes, but half of all Americans have no stocks. Wealth redistribution on steroids is what this is.

"Corporations in the US pay, on average, 13% and not the 35% they should be paying."

Does it occur to you that no corporation currently paying 13% is going to be directly affected by dropping the top rate to 20%?

"Lowering the sticker rate from 35% to 20% without closing many loopholes, which is what the Republicans are doing, will blow a hole in the federal budget."

The data doesn't support that. The current estimate it will lower tax collections about $100 billion per year. [$1 trillion over 10 years] . The US has average $847 billion per year in deficit spending over the last 10 years. (and was $666 billion for this fiscal year) So, this will amount to an increase in deficit spending of about 12%.

I don't agree with the increase in the deficit and would much prefer to see that Federal spending was cut by $100 billion per year to make this deficit neutral. But it's clearly not going to "blow a hole in the federal budget".

Apologize about the typos.

And here's the link:

What about 100% inflation-based financing? No T-bills, no taxes...just print the money as you go! On the surface it seems absurd, but since we've already accepted fiat money I have a hard time seeing how it's any worse or more arbitrary than the current system, and it would certainly have a lot less overhead...

I asked that very question not too long ago on this thread. I suspect it would probably work and it wouldn't generate a lot of inflation.

True. I keep thinking I must be fundamentally missing something. But it's also possible that, even though most economists intellectually accept that the government is not a household and that money is now essentially a monopoly overseen by the state, they don't see that the whole tax/deficit/debt debate has the same foundations as the household debit/credit model that they've already dismissed for the state.

Well consider this, nominal GDP is growing without inflation by about $800B a year. Suppose the following happens:

1. All taxes are cut to 0. Filing is still required because many things like calculating social security benefits depend upon the gov't knowing how much you made in your lifetime.
2. The Treasury finances all spending by selling bonds.
3. The Fed purchases $800B of bonds each year and will sell or buy bonds beyond that to achieve their goal of low inflation and full employment. The Treasury is simply selling bonds at auction to whoever is willing to buy them, Fed or individual investors.

The impacts I would see would be:
1. Dramatic reduction in government'd immediately increase disposable income for nearly everyone with a job and almost all businesses. That would wipe out a lot of income based entitlement spending.
2. Gov't spending would actually be checked since the Fed is keeping inflation level this is not a case of Weimar Germany or the Confederate States printing money in a last ditch effort to save themselves from a collapsing situation.

Obviously from the standpoint of taxpayers, it is better if nobody pays any.

Shout it from the rooftops, economists are geniuses!

It only gets harder if you try a complex analysis of revenue, spending, costs of one, returns on the other. But why do that? Tax cuts feel good, for corporations and other people.

Policy as hedonism.

A shout from another rooftop:

"For years, Republicans promised that their tax cuts would pay for themselves, once you accounted for all the economic growth they'd unleash. They even mandated that Congress's own nonpartisan internal scorekeepers take into account this "macroeconomic feedback" when evaluating the budgetary effect of major bills such as this one.

But now the Senate is racing to vote before those scorekeepers have a chance to evaluate their claim about the bill's cost (or lack thereof, supposedly).

This is surely no accident. Outside groups, including one favorable to the tax overhaul, have already done their own analyses. So far none has found that the bill generates enough growth to pay for itself."


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