Economic Effects of Regional Tax Havens

How does the opportunity to use tax havens influence economic activity in nearby non-haven countries? Analysis of affiliate-level data indicates that American multinational firms use tax haven affiliates to reallocate taxable income away from high-tax jurisdictions and to defer home country taxes on foreign income. Ownership of tax haven affiliates is associated with reduced tax payments by nearby non-haven affiliates, the size of the effect being equivalent to a 20.8 percent tax rate reduction. The evidence also indicates that use of tax havens indirectly stimulates the growth of operations in non-haven countries in the same region. A one percent greater likelihood of establishing a tax haven affiliate is associated with 0.5 to 0.7 percent greater sales and investment growth by non-haven affiliates, implying a complementary relationship between haven and non-haven activity. The ability to avoid taxes by using tax haven affiliates therefore appears to facilitate economic activity in non-haven countries within regions.

Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment

This paper considers the effect of taxation on the location of foreign direct investment (FDI) and taxable income reported by multinational firms with particular attention to the regional dynamics of tax competition and the role of chains of ownership. Confidential affiliate-level data are used to compare the investment and income-reporting behavior of American-owned foreign affiliates across ownership forms and regions. Ten percent higher tax rates are associated with 5.0 percent lower FDI, controlling for parent company and observable aspects of local economies, and 0.9 percent lower returns on assets, controlling for parent company and level of FDI. Tax effects are particularly strong within Europe, where ten percent higher tax rates are associated with 7.7 percent lower FDI and 1.7 percent lower returns on assets. Indirectly owned foreign affiliates also exhibit strong tax effects, ten percent higher tax rates being associated with 12.0 percent lower FDI and 1.4 percent lower returns on assets. American firms finance a growing fraction of their foreign operations indirectly through chains of ownership, which now account for more than 30 percent of aggregate foreign assets and sales. Ownership chains are particularly concentrated among European affiliates. Since multinational firms from countries other than the United States face tax environments similar to those faced by indirectly owned affiliates of American companies, these results suggest a greater sensitivity of FDI to taxes for non-American firms. The results also suggest that European economic integration may have the effect of intensifying tax competition between European jurisdictions.

The Polarized Spectrum of Apm 08279+5255

We report the discovery of significant linear polarization (p > 1%) in the hyperluminous z=3.87 BALQSO APM~08279+5255. The polarization spectrum is complex, with properties similar to those of other, lower redshift but more highly polarized BALQSOs. The resonance emission lines are unpolarized while the absorption troughs show polarization similar to or higher than the continuum. In particular, an apparent increase of polarization in the trough covering 1000-1030 angstroms (rest) supports the interpretation of this feature as a broad absorption component associated with OVI/Ly_beta local to the QSO, as opposed to an intervening damped Ly_alpha absorption system. The elevated polarization in some of the absorption features implies that we view the scattered (polarized) spectrum through a sightline with less absorbing material than the direct spectrum. Therefore, the complex structure of the polarization spectrum in this brilliant lensed BALQSO suggests that it will be an important laboratory for studying the structure of QSOs at high redshift.Comment: 8 pages, 1 figure. Accepted for publication in The Astrophysical Journal Letter

A Multinational Perspective on Capital Structure Choice and Internal Capital Markets

This paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of American multinational corporations. The evidence indicates that 10 percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios of American-owned affiliates, and that borrowing from related parties is particularly sensitive to tax rates. Borrowing by American affiliates responds to local inflation and political risks, and is more costly in countries with underdeveloped capital markets and those providing weak legal protections for creditors. Affiliates in environments where external borrowing is costly borrow less from unrelated parties: one percent higher interest rates are associated with 1.4 to 2.0 percent less external debt as a fraction of assets. Instrumental variables analysis reveals that affiliates substitute loans from parent companies for between half and three quarters of the reduced borrowing from unrelated parties stemming from adverse local capital market conditions. These patterns suggest that multinational firms are able to structure their finances in response to tax and capital market conditions, thereby creating opportunities not available to many of their local competitors.

Foreign Direct Investment and Domestic Economic Activity

How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.

Capital Structure with Risky Foreign Investment

American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do other foreign affiliates of the same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.

Copycatting: Fiscal Policies of States and Their Neighbors

This paper formalizes and tests the notion that state governments' expenditures depend on the spending of similarly situated states. We find that even after allowing for fixed state effects, year effects, and common random effects between neighbors, as state government's level of per capita expenditure is positively and significantly affected by the expenditure levels of its neighbors. Ceteris paribus, a one dollar increase in a state's neighbors' expenditures increases its own expenditure by over 70 cents.

NICMOS Observations of the Pre-Main-Sequence Planetary Debris System HD 98800

Spectral energy distributions (SEDs) from 0.4 to 4.7 microns are presented for the two principal stellar components of HD~98800, A and B. The third major component, an extensive planetary debris system (PDS), emits > 20% of the luminosity of star B in a blackbody SED at 164 +/- 5K extending from mid-IR to millimeter-wavelengths. At 0.95 microns a preliminary upper limit of < 0.06 is obtained for the ratio of reflected light to the total from star B. This result limits the albedo of the PDS to < 0.3. Values are presented for the temperature, luminosity, and radius of each major systemic component. Remarkable similarities are found between the PDS and the interplanetary debris system around the Sun as it could have appeared a few million years after its formation.Comment: LaTeX, 9 pages with 1 encapsulated postscript figure and one specially formatted Table which is rendered as a postscript file and included as a figure. Accepted for publication in Astrophysical Journal Letter