Foreign Tax Holiday Participation and US Job and Investment Loss

ABSTRACT We investigate whether foreign tax holiday participation among US multinational companies is associated with offshoring US jobs and other domestic investment activities. We find that foreign tax holiday participation is associated with (1) an increase in offshoring US jobs and (2) a decrease in domestic investment, as proxied by changes in the number of employees, capital expenditures, and R&D activity. Furthermore, we find evidence suggesting that the association between targeted, temporary tax incentives provided by foreign tax holidays and firms' domestic activities is stronger among firms with a smaller foreign presence and is distinct from the impact of foreign statutory tax rate changes. Overall, the results of this study increase our understanding of the firm‐level consequences of foreign tax holiday participation, the influence of various tax incentive structures on the allocation of firm resources, and the potential consequences of international tax competition.