The Missing Profits of Nations

Thomas Tørsløv, Danmarks Nationalbank, Ludvig Wier, Danish Ministry of Finance, Gabriel Zucman, UC Berkeley and NBER

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. U.S. multinationals shift twice as much profit as other multinationals relative to the size of their foreign earnings. We analyze 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 United States, 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.