Profit Shifting, Employee Pay, and Inequalities: Evidence From US-Listed Companies

Abstract

Corporate tax avoidance has become a salient policy issue and has regularly been accused of aggravating income inequalities. However, systematic evidence on this topic remains lacking. I empirically explore in this paper the effect of profit shifting activities of multinational enterprises on employee pay. Using a rich database on executives, foreign subsidiaries, and financial statements of US-listed companies, I find that this effect substantially varies across occupations. On the one hand, chief executive officers and chief financial officers receive higher compensations when their firm enters tax havens. On the other hand, non-executive employees, if anything, see their wages fall. Furthermore, the inequality-deepening effect of profit shifting is driven by companies that reward executives on an after-tax basis and more pronounced in companies that are intensive in intangible assets. These new empirical findings cast light on the distributional consequences of profit shifting, the evolution of income inequalities, public opinion about globalization, and ongoing debates on corporate tax reforms.