Strategic income shifting in uncertain times: Insights from economic policy uncertainty

Abstract

We explore the impact of economic policy uncertainty (EPU) on outbound income shifting by U.S. firms, offering valuable insights into how firms adapt their tax strategies under uncertain economic conditions. Using a unique dataset from De Simone et al. (2019) originally derived from confidential IRS records, we find a significant positive effect of EPU on outbound income shifting. Firms respond to uncertainty by more actively reallocating profits across jurisdictions to mitigate risk. These findings are consistently validated through rigorous methods, including propensity score matching, entropy balancing, and instrumental-variable analysis. We also show that firms with higher tax burdens are more inclined to shift income, while those with significant dividend commitments tend to adopt conservative approaches. Income shifting attributable to EPU is shown to erode firm value and profitability, possibly due to regulatory scrutiny and reputational risks. However, strong governance, particularly independent and gender-diverse boards, helps mitigate income shifting during uncertain times.