Global Ripple Effects of Corporate Tax Reforms

We study the cross-country effects of corporate tax reforms in a fragmented global tax regime. Using firm-level evidence on the 2017 U.S. Tax Cuts and Jobs Act (TCJA) and a quantitative general-equilibrium model, we illustrate how multinational enterprises (MNEs) propagate local policy shocks globally. Our framework emphasizes two properties of intangible capital: nonrivalry and mobile ownership. The TCJA generated positive outward ripple effects through two channels. First, it boosted U.S. MNEs’ intangible investment, raising output at their foreign subsidiaries. Second, it raised tangible investment by the U.S. subsidiaries of foreign MNEs, inducing their foreign parents to expand intangible investment at home. Conversely, a Global Minimum Tax (GMT) that allows low-tax jurisdictions to impose top-up taxes on U.S. MNEs’ affiliate earnings generates negative inward ripple effects on GDP and tax revenue for the United States. These findings illustrate that there is no such thing as a purely domestic corporate tax policy.