Corporate Tax Rate Differentials and Transfer Price Manipulation: Evidence from Bilateral Trade Data

Summer 2017

William Sandholtz : Economics, Statistics

Donor: Leadership Fund
Mentor: Gabriel Zucman

For the most part, individuals must break the law in order to escape paying U.S. individual income taxes.  However, corporations can legally avoid (or at least defer indefinitely) paying U.S. corporate income taxes by taking advantage of loopholes in the tax laws of various countries.  Major U.S. companies such as Google and Apple have made headlines with their intricate tax avoidance schemes, which cost the U.S. government billions of dollars in tax revenue.  One major component of tax avoidance by large U.S. multinational corporations is the artificial shifting of profits to low-tax countries by manipulating inter-company transfer prices.  My research attempts to find evidence of transfer mispricing in U.S. bilateral trade data.  I am investigating how corporate tax rate differentials between the U.S. and other countries create incentives to manipulate transfer prices, and to what extent artificial profit shifting via transfer prices distorts bilateral trade flows.

I would like to thank the Leadership Fund for its generosity in sponsoring my independent research this summer. Participating in SURF introduced me to new skills and research practices that will be immensely helpful as I continue work on my project. Moreover, this experience showed me the reality that research is a slow process that rarely goes as planned. Nevertheless, conducting research full-time over the summer affirmed my desire to earn a doctorate in economics after I graduate. I not only feel more prepared to apply this fall, but I am more certain that I am suited for a career in academia.