Taxation and the Sources of Growth
Taxation and the Sources of Growth
Estimates from U.S. Multinational Corporations
Numerous careful studies of productivity have been made at the firm level. None of these studies, however, focus on multinational corporations (MNCs) in the United States despite their important role in the global economy. In the canonical Solow (1957) growth model, tax policy can affect the growth rate of output by changing the growth rates of factor inputs such as capital and labor. In this model, tax changes cannot affect total factor productivity (TFP) directly because improvements in productivity are disembodied. However, when technical change is embodied in capital, tax policy can affect TFP through investment. To gauge whether this role for tax policy is economically important, this chapter uses a vintage capital model, with both embodied and disembodied technical change, to analyse the sources of growth of U.S. MNCs. Specifically, it analyzes the parameters of the MNC's production technology and uses them to study the sources of firm growth. It shows that growth in parent and affiliate capital is the most important. The importance of foreign direct investment is especially striking.
Keywords: multinational corporations, total factor productivity, tax policy, foreign direct investment, capital, firm growth, technical change, United States
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