Borderline Case International Tax Policy, Corporate Research and Development, and Investment (1997) / Chapter Skim
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INTRODUCTION
INTRODUCTION
Pages 1-8
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tax code includes a foreign tax credit provision that allows U.S.-based firms to reduce their U.S. tax liability by the amount of foreign tax payments, subject to a variety of limitations.
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These rules can, in some cases, also raise the effective tax burdens on the domestic source income of foreign members of U.S.based multinationals. The anti-deferral rules in the United States stand in marked contrast to the tax rules in many other developed nations, a number of which do not tax the foreign-source earnings of their domestic multinationals at all.
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They affect the incentives for firms to carry out research and to invest in physical capital in other nations, because foreign operations can have immediate consequences for the firm's corporation tax liability in the United States. International tax rules can also affect the tax burdens that multinational firms face on purely domestic projects.
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The discussion of how international tax rules affect individual firm decision making provides an important warrant for studying these public policy questions, but it does not lead naturally to quantitative evidence on how these tax rules and other tax incentives affect total private R&D outlays and private investment spending. To address these issues, the STEP Board commissioned summary papers from several leading academic researchers who have studied the influence of taxation on corporate R&D and plant and equipment investment.
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Firms that face higher after-tax costs of borrowing in the United States borrow less and are more likely to configure their financial structure in alternative ways that preserve interest-tax deductions An important open issue with respect to tax rates, R&D outlays, and physical investment concerns the degree to which changes in the location of R&D facilities affect the location of follow-on manufacturing facilities. There appears to be substantial variation across industries, and even across manufacturing processes, in the links among basic research, development, and subsequent manufacturing operations.
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In the decade since the watershed tax reform of 1986, however, other developed nations have modified their tax codes, and as a result, U.S.-based firms no longer enjoy a statutory tax rate well below that of other countries. The statutory tax rate in the United States also depends on the combined federal and state income tax rates.
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Nevertheless, the shifting pattern of relative statutory tax rates in the United States and other nations during the last decade warrants attention from policymakers. A third set of proposed tax changes involves incremental reforms to the foreign-source income rules in the current corporation income tax.
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