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The Missing Profits of Nations

Author

Listed:
  • Thomas Tørsløv
  • Ludvig Wier
  • Gabriel Zucman
Abstract
By exploiting new macroeconomic data known as foreign affiliates statistics, we show that affiliates of foreign multinational firms are an order of magnitude more profitable than local firms in a number of low-tax countries. Leveraging this differential profitability, we estimate that 36$\%$ of multinational profits are shifted to tax havens globally. US multinationals shift twice as much profit as other multinationals relative to the size of their foreign earnings. We analyse how the location of corporate profits would change if shifted profits were reallocated to their source countries. Domestic profits would increase by about 20$\%$ in high-tax European Union countries, 10$\%$ in the US, and 5$\%$ in developing countries, while they would fall by 55$\%$ in tax havens. We provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting. In contrast to the picture painted by official statistics, our results suggest that the corporate capital share has increased not only in North America but also in high-tax European countries. Capital is making a comeback globally, but its rise is obscured by the tax avoidance strategies of multinational companies.

Suggested Citation

  • Thomas Tørsløv & Ludvig Wier & Gabriel Zucman, 2023. "The Missing Profits of Nations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(3), pages 1499-1534.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:3:p:1499-1534.
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    File URL: http://hdl.handle.net/10.1093/restud/rdac049
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    More about this item

    Keywords

    Multinationals; Profit shifting; Factor shares;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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