How Does U.S. Tax Rate Affect Corporate Innovation?

James F. Albertus, Tepper School Assistant Professor of Finance, speaks about his research on how jumping through tax loopholes might affect other areas of corporate behavior.

Video Transcript

I specialize a lot in studying multinational firms, especially how they avoid taxes.

My research paper is "Heads I Win, Tails You Lose: Asymmetric Taxes, Risk Taking, and Innovation." A lot of firms seem to be shifting profits through their organization to avoid taxes. And so we just got to thinking about what other consequences that avoidance might have — specifically, how they invest, the types of investments they undertake, how risky those investments are, and how big those investments are.

The empirical part assembles data from lots of different sources, including information on U.S. multinationals' foreign operations from 1999 to 2010. We find that the stronger the asymmetry between foreign tax rates and the U.S. tax rate, which is to say, the higher the U.S. tax rate relative to foreign tax rates, the riskier the projects the firms undertake.

Think about, for example, a pharmaceutical company that's developing a drug to be used globally. Much of that research and development happens in the United States. That expense can reduce the firm's tax obligation in the United States, if it can record profits in countries that have low tax rates and record expenses in countries like the United States with relatively high tax rates.

One of the objectives of the 2018 tax overhaul was to spur economic growth in the United States. And one of the implications of our paper is that because the federal tax rate fell, firms might become less likely to invest in risky projects or innovative projects, which we think as economists are generally going to drive economic growth, especially in the long run.