Don't impose punitive taxes on our multinationals

The Obama Administration proposes to increase the costs of doing business abroad for US multinationals "...finally ending the tax breaks for corporations that ship our jobs overseas."

Do US firms that invest and do business abroad take jobs away from Americans?  Should we tax them harder, or impose other onerous burdens on them to make them produce here?

Mihir Desai and his co-authors say think twice.  In a new article in the new journal Economic Policy ("Domestic Effects of the Foreign Activities of US Multinationals"), they look at actual behavior by U.S. multinational companies between 1982 and 2004.  They find that firms investing more abroad tend to invest more at home, firms that pay foreign employees more tend to pay more at home:

...10 percent greater foreign capital investment triggers 2.6 percent additional domestic capital investment, and ... 10% greater foreign employee compensation is associated with 3.7 percent greater domestic employee compensation.  There are similar positive relationships between foreign and domestic changes in assets and numbers of employees...  greater foreign activity is associated with higher exports from US parent companies to their foreign affiliates and with greater domestic research and development (R&D) spending.

There's more than one way to think about multinationals.  Those who see foreign investment as a threat may think of them with a...

...total worldwide production level... approximately fixed, being determined by resource limits, capacity constraints, or market competition.  This  would imply that foreign and domestic factors of production are conditional substitutes and that any additional foreign production then reduces domestic production.

On the other hand you could think of it this way...

...the level of total production might not be fixed but, instead, responsive to profit opportunities that are influences by economic growth rates.  Increases in FDI may then raise the return to domestic production, stimulating domestic factor demand and domestic output.  Firms might, for example, find that foreign operations provide valuable intermediate inputs at low cost, or that foreign affiliates are ready buyers of tangible and intangible property produced in the United States.

It's a question to be solved by the evidence, not by competing theories.  This evidence seems to suggest the second is a better description of the way things are.

These results have policy implications:

These results carry implications for US policies that influence the attractiveness of foreign investment to US firms.  There is a great deal of recent political concern that greater foreign business activity, whatever its source, comes at the cost of reduced domestic activity.  This viewpoint is responsible for a number of actual and proposed government policies.  For example, recent proposals requiring US firms to abide by US labor and regulatory standards when operating abroad would increase the cost of certain foreign activities in the hope of making domestic operations more competitive.  Those who advocate greater US taxation of active foreign business income often do so in the belief that subjecting foreign business income to high rates of tax will stimulate demand for domestic factors of production.  While plausible, and perhaps intuitive, the premise motivating these policies appears to be inconsistent with the evidence presented in this paper.

There may be reasons for reforming taxation of multinational firms, but an attempt to penalize them for purported job exports isn't one of them.

Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr.  Domestic Effects of the Foreign Activities of US Multinationals.  American Economic Journal Economic Policy.  1(1): 181-203.  February 2009.