Chapter

Taxation and the Sources of Growth

Jason G. Cummins

in International Taxation and Multinational Activity

Published by University of Chicago Press

Published in print March 2001 | ISBN: 9780226341736
Published online February 2013 | e-ISBN: 9780226341750 | DOI: http://dx.doi.org/10.7208/chicago/9780226341750.003.0010
Taxation and the Sources of Growth

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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

Chapter.  12330 words.  Illustrated.

Subjects: International Economics

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