How do offshore tax havens affect corporate tax payments?
Research by Bradley Lindsey, Assistant Professor of Accounting, along with Scott Dyreng of Duke's Fuqua School of Business discovered that this is a $86.5 billion question.
The pair used public data from corporate annual reports to find that the average U.S. multinational corporation paid 4% of its foreign earnings in U.S. Federal tax, an estimate verified by a recent study by the Government Accountability Office. They also find that this 4% federal tax is on top of an average tax of 26% of foreign earnings paid to the foreign governments in which the firms operate.
When added together, Dyreng and Lindsey estimate that US multinational corporations are paying an average of 30% tax on foreign earnings to taxing authorities somewhere in the world.
So, how much can the government expect to collect by changing corporate tax rules? Dyreng and Lindsey estimate federal tax on foreign income would increase by about 4.5 percentage points if deferral were eliminated, bringing the total tax on foreign earnings to around 35%, equal to the current tax on earnings for companies operating domestically. When translated to dollars, this corresponds closely to the $86.5 billion over 10 years estimated by the President.
Their research paper, titled, "Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on US Multinational Firms' Tax Rates," has been accepted for publication in the Journal of Accounting Research.
For more, download the full paper from the Social Science Research Network.