Repatriation taxes and dividend distortions

This paper analyzes the effect of repatriation taxes on dividend payments by the foreign affiliates of American multinational firms. The United States taxes the foreign incomes of American companies, grants credits for any foreign income taxes paid, and defers any taxes due on the unrepatriated earnings for those affiliates that are separately incorporated abroad, This system thereby imposes repatriation taxes that vary inversely with foreign tax rates and that differ across organizational forms. As a consequence, it is possible to measure the effect of repatriation taxes by comparing the behavior of foreign subsidiaries that are subject to different tax rates and by comparing the behavior of foreign incorporated and unincorporated affiliates. Evidence from a large panel of foreign affiliates of U.S. firms from 1982 to 1997 indicates that I percent lower repatriation tax rates are associated with I percent higher dividends, This implies that repatriation taxes reduce aggregate dividend payouts by 12.8 percent, and, in the process, generate annual efficiency losses equal to 2,5 percent of dividends. These effects would disappear if the United States zvcre to exeniptforeign income from taxation.