The Fifth World KLEMS Conference, Harvard University June 5, 2018 Offshore Profit Shifting and Domestic Productivity Measurement F. Guvenen, R.J. Mataloni Jr., D.G. Rassier, K.J. Ruhl The Fifth World KLEMS Conference, Harvard University June 5, 2018
Presentation Outline Slowdown in U.S. productivity Selected research Productivity measurement Our study Hypothesis Research design Data Results for U.S. multinationals Results for U.S. GDP and U.S. labor productivity 2/2/2019
Slowdown in U.S. labor productivity Source: Decker, Haltiwanger, Jarmin, and Miranda (2017) 2/2/2019
Explanations of productivity slowdown Real economy-based Decline in business dynamism Decker, Haltiwanger, Jarmin, and Miranda (2017) Slowdown in ICT investments Fernald (2015) Measurement-based Prices of new products overstated Feldstein (2017) Profit shifting by multinationals Guvenen, Mataloni, Rassier, and Ruhl (2017) 2/2/2019
Labor productivity formula* 𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 * All variables pertain to the U.S. business sector. 2/2/2019
Strategic movement of intangible assets Ownership of intangible assets transferred between units of multinationals should be valued at arm’s length prices...but may not be. Unique assets Information asymmetry between the firm and the tax authority Legal contracting arrangements E.g. Cost sharing agreements 2/2/2019
Our hypothesis Multinationals have moved ownership of some intangible assets from the United States to lower-tax locations. This change has: Raised measured output abroad Lowered measured output in the United States . 2/2/2019
Global allocation of U.S. MNE profits for economic accounting purposes Currently Based on the separate financial accounts of geographic operating units of U.S. multinationals In our study Reapportioned to where value is created based on employee compensation and unaffiliated sales 2/2/2019
Reapportionment: GDP, GNP In our reapportionment of profits … Some profits currently recorded here Consumption GDP + Investment + Receipts of income (on direct and portfolio investment) from ROW + Government spending + Exports Are moved here - Payments of income to ROW - Imports U.S. GDP U.S. GNP ROW = Rest of world 2/2/2019
Data Domestic value added Domestic hours worked BEA NIPAs and GDP by industry statistics Domestic hours worked BLS labor productivity and cost statistics Global profits, unaffiliated sales, and employee compensation of U.S. MNEs BEA activities of MNEs statistics 2/2/2019
Foreign profits* of U.S. MNEs before reapportionment * Earnings on U.S. direct investment abroad 2/2/2019
Reapportionment of U.S. MNE global profits 2012 ($ billions) 2/2/2019
Aggregate Measures: Formulary Adjustments 2/2/2019
Aggregate results for U.S. labor productivity For annual U.S. productivity growth, our reapportionment Is largest in 2000-08 when it: Adds 0.2%, on average, annually to productivity growth in all industries Adds 0.6%, on average, annually in R&D-intensive industries Adds only 0.1%, on average, annually in all other industries Reduces, but does not eliminate, the U.S. labor productivity slowdown 2/2/2019
Summary Intangible capital and MNEs: growing role in the global economy Increasing potential to affect measured value-added Formulary apportionment provides insight Adjustments increase since the mid-1990s Larger for R&D intensive industries Most of our effects show up for 1994-2014 Add $3.6 trillion to U.S. GDP … But these adjustment are not large enough to erase the recent U.S. labor productivity slowdown 2/2/2019