The Effect of Taxes on Investment and Income Shifting to Puerto Rico

The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the United States. This lowers the tax penalty on investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate....

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Bibliographic Details
Published in:The review of economics and statistics 1998-08, Vol.80 (3), p.365-373
Main Authors: Grubert, Harry, Slemrod, Joel
Format: Article
Language:English
Subjects:
Business structures
Capital investments
Corporate income taxes
Corporations
Econometrics
Economic impact
Economic models
Estimated taxes
Income shifting
Income taxes
Investment
Investment income
Investment return rates
Investment tax credits
State income tax
Studies
Taxable income
Taxes
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Summary:The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the United States. This lowers the tax penalty on investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate. This paper investigates these two interrelated impacts of taxation by developing a structural econometric model of the joint decisions regarding investment and income shifting, and estimating the model using firm-level data on the activity U.S. corporations in Puerto Rico. The results suggest that the income shifting advantages are the predominant reason for U.S. investment in Puerto Rico.
ISSN:0034-6535
1530-9142
DOI:10.1162/003465398557609