COUNTRY AND MULTINATIONAL COMPANY RESPONSES TO THE TAX-REFORM ACT OF 1986

We examine tax data on U.S.-based multinational corporations to study responses to the Tax Reform Act of 1986. Changes under the reform tend ed to push companies toward excess foreign tax credit positions, which gave companies an incentive to reduce foreign taxes. Countries also h ad an incentive to reduce tax rates to forestall company responses. We find that average foreign tax rates did decrease substantially betwee n 1983 and 1992. This decrease was not caused by changes in income or dividend repatriation patterns, or by changes in the locations of real investments, but primarily by reductions in country average tax rates . The reductions closely paralleled the reduction in the U.S. statutor y corporate tax rate.