Repatriation Taxes and Dividend Distortions

Mihir A. Desai, C. Fritz Foley and James Hines

No 8507, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the effect of repatriation taxes on dividend payments by the foreign affiliates of American multinational firms. The United States taxes the foreign incomes of American companies, grants credits for any foreign income taxes paid, and defers any taxes due on the unrepatriated earnings for those affiliates that are separately incorporated abroad. This system thereby imposes repatriation taxes that vary inversely with foreign tax rates and that differ across organizational forms. As a consequence, it is possible to measure the effect of repatriation taxes by comparing the behavior of foreign subsidiaries that are subject to different tax rates and by comparing the behavior of foreign incorporated and unincorporated affiliates. Evidence from a large panel of foreign affiliates of U.S. firms from 1982 to 1997 indicates that one percent lower repatriation tax rates are associated with one percent higher dividends. This implies that repatriation taxes reduce aggregate dividend payouts by 12.8 percent, and, in the process, generate annual efficiency losses equal to 2.5 percent of dividends. These effects would disappear if the United States were to exempt foreign income from taxation.

JEL-codes: F23 G35 (search for similar items in EconPapers)
Date: 2001-10
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: ITI PE
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Citations: View citations in EconPapers (82)

Published as Desai, Mihir A., C. F. Foley and J. R. Hines Jr. "Repatriation Taxes and Dividend Distortions." National Tax Journal 54, 4 (December 2001): 829-851.

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