1. 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

2. 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

3. Slowdown in U.S. labor productivity
Source: Decker, Haltiwanger, Jarmin, and Miranda (2017)
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4. 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

5. Labor productivity formula*
𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
* All variables pertain to the U.S. business sector.
2/2/2019

6. 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
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7. 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 .
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8. 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

9. 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
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10. 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
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11. Foreign profits* of U.S. MNEs before reapportionment
* Earnings on U.S. direct investment abroad
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12. Reapportionment of U.S. MNE global profits
2012 ($ billions)
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13. Aggregate Measures: Formulary Adjustments
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14. Aggregate results for U.S. labor productivity
For annual U.S. productivity growth, our reapportionment
Is largest in 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
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15. 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
Add $3.6 trillion to U.S. GDP
… But these adjustment are not large enough to erase the recent U.S. labor productivity slowdown
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