taxation and the allocation of risk inside the multinational firm abstract this paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm theoretically we identify three mechanisms through which corporate taxes may shape the within firm allocation of risk 1 transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low tax jurisdictions as a means to shift profits 2 risk averse owners create incentives to allocate risk to high tax affiliates to maximize risk sharing with governments 3 limited loss offset creates incentives to shift risk to affiliates in other countries empirically we show that multinational firms disproportionately allocate risk to low tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules within firm differences in risk explain a significant fraction of the well established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non negligible channel for profit shifting

a gravity model analysis of international migration to north america this study examines the influence of political economic and demographic factors on the size and composition of migration flows to north america a modified gravity model is specified and adjusted to include immigration regulations and characteristics specific to the origin and destination countries for empirical test of the model the time period of study is from 1976 1986 and 70 countries are covered for a total of 1540 observations of migration flows to canada and the usa the results reveal that the population of origin countries and the income of destination countries are two major determinants of migration to north america high population areas of asia and latin america provided a large share of the immigrants domestic restrictions on political and civil freedom in origin countries are found to significantly impair migration to north america

health shocks and human capital accumulation the case of spanish flu in italian regions percoco m health shocks and human capital accumulation the case of spanish flu in italian regions regional studies the impact of health on economic development is a hotly debated issue in the economics literature with most scholars supporting the idea that the diffusion of diseases is detrimental to development in this context pandemics are an important case study given their exogenous nature which makes identification of the impact of diseases on development clearer than in other cases such as malaria or smallpox this paper focuses on spanish flu in italy one of the countries with the highest mortality rate due to the pandemic by exploiting the regional variation in mortality and focusing on the hypothesis of the foetal origins of cognitive abilities the long run consequences of influenza exposure in terms of human capital accumulation are estimated an average reduction of 0 3 0 4 years of schooling for the cohort born in 1918 20 is found this result points to a small but persisting effect

innis lecture environmental crises past present and future environmental crises are distinguished by rapid and largely unexpected changes in environmental quality that are difficult if not impossible to reverse examples would be major extinctions and significant degradations of an ecosystem i argue there are three preconditions for crisis failures in governance an ecological system exhibiting a tipping point and an economy environment interaction with positive feedbacks i develop a simple model to illustrate how a crisis may arise and draw on our knowledge of past and present crises to highlight the mechanisms involved i then speculate as to whether climate change is indeed a crisis in the making les crises environnementales sont caracterisees par des changements rapides et largement non anticipes dans la qualite de l environnement qui sont difficiles sinon impossibles a renverser des exemples pourraient etre des extinctions d especes et des degradations significatives d un ecosysteme l auteur suggere qu il faut trois conditions pour qu il y ait crise faillites de gouvernance un systeme ecologique au point de bascule et une interface environnement economie riche de retroactions positives l auteur developpe un modele simple pour illustrer comment une crise peut emerger et s appuie sur la connaissance des crises passees et presentes pour souligner les mecanismes en jeu on specule en fin de texte sur la question a savoir si le changement climatique est une crise en train de prendre

changes in the cyclical sensitivity of wages in the united states 1891 1987 the conventional wisdom that nominal wages became less sensitive to the business cycle and more autocorrelated after world war ii is reexamined here by considering whether these properties are artifacts of the methods used to construct prewar wage series a replication based on these methods is more cyclically sensitive and exhibits less autocorrelation than the postwar data aggregation using variable instead of fixed employment weights also greatly exaggerates the cyclicality of prewar wages these biases imply that wages are just as sensitive to the cycle today as one hundred years ago perhaps even more so copyright 1992 by american economic association

immigrant participation in the welfare system this paper presents a systematic analysis of immigrant participation in the us welfare system using the 1970 and 1980 us censuses in contrast to the previous studies the researchers focused on changes in welfare use across immigrant cohorts over time for a single immigrant cohort as it assimilates to the us furthermore it develops a theoretical model of the migration decision that explicitly incorporates the income insurance aspect of the us welfare system the analysis revealed that recent immigrant cohorts use the welfare system more intensively than earlier immigrant waves also the immigrant welfare participation was greater the longer an immigrant household had resided in the us and those characteristics of the immigrants country of origin were important determinants of welfare participation in addition the theoretical model of the migration decision which explicitly incorporated the presence of a welfare system in the destination country and this model could account for some of the ways in which source country characteristics were found to affect immigrant welfare participation

repatriation taxes repatriation strategies and multinational financial policy abstract several investment repatriation strategies are added to the standard model of a multinational in which an affiliate is located in a low tax country and is limited to two alternatives repatriating taxable dividends to the parent or investing in its own real operations in our model affiliates can invest in passive assets which the parent can borrow against or in related affiliates which can be used as vehicles for tax favored repatriations we show analytically how the availability of alternative strategies can effect real investment throughout the worldwide corporation we use firm level data for us multinationals to test for the importance of alternative strategies the evidence is generally consistent with the theory particularly the strategies using related affiliates

undocumented immigration and income inequality in the native born population of the us econometric evidence according to the theoretical models suggested by chiswick and others the growing presence of undocumented immigrants in the us should have a disequalizing effect on income distribution in the native born population however this proposition has not been subjected to empirical test here an econometric model of income inequality in native born households is constructed and census based estimates of the state distribution of undocumented immigrants are used to estimate model parameters the results show that such immigration has been disequalizing but that the impact has been small ranking behind several other socio economic variables

the impact of immigration on the human capital of natives implications of the quantity number and quality skill of immigration on the destination economy are analyzed including impacts on value added wages quasi rents rates of return and the skill distribution of the native labor force quantity quality trade offs are considered for both immigrant and native workers medium and long run labor supply responses by natives to immigrant induced changes in wage rates are shown to have second order effects which substantively affect the impacts of immigrants the impact of immigration policy depends on the quality as well as quantity of immigrants the time horizon and the speed of factor market adjustment

international corporate tax avoidance a review of the channels magnitudes and blind spots this paper reviews the rapidly growing empirical literature on international tax avoidance by multinational corporations it surveys evidence on main channels of corporate tax avoidance including transfer mispricing international debt shifting treaty shopping tax deferral and corporate inversions moreover it performs a meta analysis of the extensive literature that estimates the overall size of profit shifting we find that the literature suggests that for the most recent year a 1 percentage point lower corporate tax rate compared to other countries will expand before tax income by 1 5 percent an effect that is larger than reported as the consensus estimate in previous surveys and tends to be increasing over time the literature on tax avoidance still has several unresolved puzzles and blind spots that require further research

war and pestilence as labor market shocks u s manufacturing wage growth 1914 1919 there is not a single expert machinist in the labor market today if such a one exists he will be able to command his own wages the arkansas gazette october 22 1918 1 i introduction the possibility of a worldwide influenza pandemic in the near future is of growing concern for many countries around the globe the world bank estimates that a global influenza pandemic would cost the world economy 800 kill tens of millions of people 2 researchers at the u s centers for disease control and prevention calculate that deaths in the united states could reach 207 000 and the initial cost to the economy could approach 166 billion or roughly 1 5 of gdp 3 the u s department of health and human services paints a more dire picture up to 1 9 million dead in the united states and initial economic costs near 200 billion 4 while researchers and public officials can only speculate on the likelihood of a global influenza pandemic many of the worst case scenario predictions for a current pandemic are based on the global influenza pandemic of 1918 this global pandemic often termed the spanish flu killed 675 000 people in the united states nearly 0 8 of the 1910 population and nearly 40 million people worldwide 5 only the black death of 13481351 is estimated to have killed more people roughly 60 million over a similar time period 6 the global magnitude and spread of the 1918 influenza pandemic was exacerbated by world war i which itself is estimated to have killed roughly 10 million civilians and 9 million troops nicolson 1980 not only did the mass movement of troops from around the world lead to the spread of the disease tens of thousands of allied and central power troops died as a result of the influenza rather than combat although combat deaths in world war i did increase the mortality rates for participating countries civilian mortality rates from the 1918 influenza were typically much higher for the united states estimates of combat related troop mortalities are about one tenth that of civilian mortalities from the 1918 influenza given the magnitudes and the concurrence of both the 1918 influenza pandemic and world war i one would expect volumes of research on the economic effects of each event although there does exist a significant literature on the economic consequences of world war i rockoff 2004 the scope of published research on the economic effects of the 1918 influenza pandemic is scant 8 most research that has been done has focused on the health and economic outcomes of decedents of pandemic survivors almond 2006 keyfits and flieger 1968 and mortality differences across socioeconomic classes mamelund 2006 noymer and garenne 2000 this paper contributes to the literature on the economic effects of the 1918 influenza pandemic and world war i by exploring the influence of mortalities from these concurrent events on the growth of manufacturing wages in u s states and cities over the period 1914 1919 9 the general conceptual foundation for the paper is that ceteris paribus both of these events resulted in a large number of deaths which constituted a significant negative shock to manufacturing labor supply and thereby would have increased wages in the manufacturing sector immediately following both events a similar conceptual framework has been used in studies that explored the economic effects of the black death campbell 1997 karakacili 2004 and the effects of immigration on labor markets borjas 1987 card 1990 greenwood and mcdowell 1986 the analysis presented here is the first to separate the potential manufacturing labor market effects of world war i and the 1918 influenza this is an interesting exercise given that mortalities from the 1918 influenza were nearly ten times greater than world war i combat mortalities but world war i combat mortalities were more likely men aged roughly 18 44 prime ages for manufacturing workers

buffalo hunt international trade and the virtual extinction of the north american bison in the sixteenth century north america contained 25 to 30 million buffalo by the late nineteenth century fewer than 100 remained while removing the buffalo east of the mississippi took over 100 years the remaining 10 to 15 million buffalo on the great plains were killed in a punctuated slaughter lasting little more than ten years i employ theory international trade statistics and first person accounts to argue the slaughter was initiated by a foreign made innovation and fueled by a foreign demand for industrial leather european demand and american policy failure are jointly responsible for the slaughter on the plains jel f14 n51 n71 q57

income inequality and international migration the purpose of this paper is to analyse the impact of international factor movements on the personal distribution of income in order to get clearcut results we use a simple model of trade and migration in which there are two traded goods and three factors for any given country one of the traded goods corresponds to exports and the other to imports the three factors include capital and two types of labour skilled and unskilled we focus mainly on the alternative results of international migration of the two types of labour the geographical focus is worldwide excerpt

diverging patterns with endogenous labor migration abstract the standard neoclassical model cannot explain persistent migration flows and lack of cross country convergence when capital and labor are mobile here we present a model where both phenomena may take place assuming increasing returns and perfect capital mobility the driving forces behind labor migration are the size and the composition of the workforce the size of the workforce produces divergence a larger workforce in one country implies higher wages the wage gap induces in migration and this makes the wage gap even larger in this case migration is only beneficial for the labor importing country the evolution in the composition of the workforce due to migration may have opposite effects in one case in migration keeps the wage of skilled workers high enough to induce people to qualify for skilled jobs this improves the composition of labor in the receiving country only and it makes divergence a likely outcome in another case labor migration keeps the relative wage of unskilled workers in the rich country high enough to induce all migrants to take unskilled jobs and reduce the skilled to unskilled ratio in that country then migration is beneficial to the country which was first exporting labor

open access harvesting of wildlife the poaching pit and conservation of endangered species abstract we extend the traditional g s model of open access by defining a non concave harvesting function we demonstrate the possible existence of multiple equilibria and perverse comparative statics and show that small changes in the underlying economic parameters may trigger large jumps in species abundance finally we briefly discuss implications for management

do swedish multinationals pay less in taxes than domestic firms in recent years there has been growing concern that multinational enterprises mnes engage in strategic tax planning in order to shift profits to low tax jurisdictions this common perception is generally confirmed by empirical evidence which is foremost provided for countries with high corporate taxes and relatively complex tax systems we investigate whether multinational firms in a country with a comparatively more competitive tax system undertake profit shifting we do this by using detailed census data from corporate income statements and balance sheets filed by swedish manufacturing firms between 1997 and 2007 many previous studies have used tax rate differences to identify profit shifting these studies however run the risk of overestimating the amount of tax shifting as this method entangles tax planning activities with the effect a lower corporate tax rate has on resulting profits we avoid this by comparing mnes with domestic firms unable to benefit from other tax jurisdictions in particular we identify systematic differences in tax payments earnings before interest and taxes and equity ratios between multinational and comparable domestic firms based on propensity score matching in addition we examine the tax behavioral impact of acquiring multinational status using difference in differences estimations and or propensity score matching our results reveal that the extent to which multinational firms have lower tax payments than their domestic counterparts depends on their production characteristics and foreign market outreach in particular we find evidence indicating that firms operating in few foreign markets and firms that become multinational engage in profit shifting from sweden less

trade theory distribution of income and immigration this paper examines the impact of mass immigration utilizing the analytical framework of so called trade theory as such its emphasis is on general equilibrium effects and on the constraints imposed by the openness of the economy on such effects the analysis will center on the distributional impact of unskilled labor immigration excerpt

extinction and market forces two case studies abstract extinction defines a loss in biodiversity an established economic model suggests that extinction can be avoided even in common property settings if the initial stock is sufficiently large that price and cost evolve to a non extinction equilibrium alternatively privatization has been suggested as a means to avoid extinction the empirical validity of these conclusions are investigated by studying the collapse of two species that signaled the end of the united states frontier the passenger pigeon and the buffalo the historical studies suggest that the theoretical possibility of a non extinction equilibrium is unlikely to hold in practice similarly while privatization in a single species context may appear feasible in a multi species context the apparent profitability of privatization may be superseded and the species driven to extinction the latter conclusion also depends on species specific characteristics of minimum viable population size and habitat requirements

immigrants minorities and labor market competition this paper investigates the extent of labor market competition among immigrants minorities and the native population an analysis of 1980 u s census data reveals that immigrants tend to be substitutes for some labor market groups and complements for others the effects of shifts in immigrant supply on the earnings of native born men are however very small on the other hand increases in the supply of immigrants do have a sizable impact on the earnings of immigrants themselves an increase of 10 percent in the supply of immigrants for example reduces the immigrant wage by about 10 percent

economic effects of immigrants on native and foreign born workers complementarity substitutability and other channels of influence the authors use standard metropolitan statistical area smsa data constructed from 1980 census microdata files and other sources to estimate a structural model of native foreign born labor demand and labor supply which distinguishes the effects upon real wages of each type of labor and on the employment of natives the authors specify econometrically estimate and simulate the structural model which incorporates not only a production structure channel through which immigrants influence area real wages and employment but also demand and native labor supply channels it is noted that while these are not the only channels through which immigrants may affect native workers the model nonetheless constitutes a step in the direction of a general equilibrium approach in the production structure channel immigrants and natives are found to be substitutes in production immigration lowers foreign born wage rates and leads to lower wages for natives the negative effects of the production channel usually are ameliorated through the demand channel further immigrants add to local demand through their earnings and potentially through non labor income while also lowering unit costs and local prices which enhances real incomes and potentially net exports and thus the demands for local output and area labor the author discusses findings of interest from the simulation results based upon an analysis of all areas

on the macroeconomic and welfare effects of illegal immigration abstract this paper uses a dynamic general equilibrium model with labor market frictions to explore the economic consequences of illegal immigration in the baseline model native workers and illegal foreign workers compete for jobs in the same market but serve as imperfect substitutes in production the calibrated model generates a u shaped relationship between long run domestic consumption and the population share of illegal immigrants after taking into account both consumption and leisure i found that an increase in illegal immigration can generate significant welfare gains for the natives the baseline model is then extended to include heterogeneous workers in the domestic population

migration of professionals from fiji to new zealand a reduced form supply demand model abstract in this study we estimate a reduced form equation for migration of highly skilled and professionally trained workers from fiji to new zealand during 1987 1990 explanatory variables include previous period s migrants occupational income in new zealand the supply of graduates in new zealand and political instability in fiji using a reduced form supply demand model to estimate the determinants of migration the study finds that the number of professional migrants from fiji was significantly and positively related to previous year s migrants the real income in new zealand and political instability in fiji

toward consilience between biology and economics the contribution of ecological economics abstract during its ten year history ecological economics has made a real difference in the way economists look at the natural world and in the way biologists look at the economy in this survey article we examine the contributions to the journal in terms of e o wilson s concept of consilience that is his argument that the methods and assumptions of any field of study should be consistent with the known and accepted facts in other disciplines in particular we examine the contributions of ecological economics to reconciling the economic theory of the consumer and producer with biophysical reality

the effect of the tax reform act of 1986 on the location of assets in financial services firms this paper examines the effects of the tax reform act of 1986 on the international location decisions of u s financial services firms the act included rule changes that made it substantially more difficult for u s firms to defer u s taxes on overseas financial services income held in low tax jurisdictions we use information from the tax returns of u s corporations to examine how local taxes affect the allocation of financial assets held abroad by financial services firms we find that before the act the location of reported assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions however after the act differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad our results suggest that the tightening of the anti deferral provisions applicable to financial services companies has been successful in diminishing the effect of host country income taxes on asset location decisions

the taxation of passive foreign investment lessons from german experience the paper evaluates the working of german cfc rules that restrict the use of foreign subsidiaries located in low tax countries to shelter passive investment income from home taxation while passive investments make up a significant fraction of german outbound fdi we find that german cfc rules are quite effective in restricting investments in low tax jurisdictions we find evidence that the german 2001 tax reform which unilaterally introduced exemption of passive income in medium and high tax countries has led to some shifting of passive assets into countries for which the exemption was previously limited ce texte evalue l impact des regles imposees aux succursales a l etranger des societes allemandes regles qui limitent l usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d investissement passif a l abri de la fiscalite dans le pays d origine ces investissements passifs constituent une fraction significative de l investissement direct a l etranger des allemands et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere les resultats montrent que la reforme fiscale allemande de 2001 qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde a entraine un deplacement des actifs passifs vers les pays pour lesquels l exemption etait limitee auparavant

assimilation changes in cohort quality and the earnings of immigrants this paper reexamines the empirical basis for two facts that seem to be found in most cross section studies of immigrant earnings 1 the earnings of immigrants grow rapidly as they assimilate into the united states and 2 this rapid growth leads to many immigrants overtaking the earnings of the natives within 10 15 years after immigration using the 1970 and 1980 u s censuses this paper studies the earnings growth experienced by specific immigrant cohorts during the period 1970 80 it is found that within cohort growth is significantly smaller than the growth predicted by cross section regressions for most immigrant groups this differential is consistent with the hypothesis that there has been a secular decline in the quality of immigrants admitted to the united states

the ramaswami proposition and the choice among labor capital and technology flows abstract this paper examines the choice between labor and capital flows in the context of a one good two country model where the two countries differ in their levels of disembodied technology in contrast to the ramaswami proposition it is shown that a country may prefer an optimal outflow of its abundant factor to an optimal inflow of its scarce factor it is also shown that for sufficiently small differences in technology the labor rich technology inferior country will benefit more from an optimal outflow of labor than from a gift of superior technology

the impact of controlled foreign company legislation on real investments abroad a multi dimensional regression discontinuity design controlled foreign company cfc rules are frequently imposed by countries as part of their anti tax avoidance legislation this paper aims at quantifying the impact of the german cfc rule on the universe of foreign investments held by german multinational firms the german cfc legislation gives rise to a multi dimensional regression discontinuity design which allows us to estimate local average treatment effects along the dimensions determining treatment our results suggest a significant and economically large impact of the cfc legislation on multinationals real activity abroad we also find evidence of some heterogeneity in estimated treatment effects according to parametric as well as nonparametric estimates

immigration and wages evidence from construction to identify relative wage impacts of immigration we make use of certification and licensing requirements in the norwegian construction sector that give rise to exogenous variation in immigrant employment shares across trades individual panel data reveal substantially lower wage growth for workers in trades with rising immigrant employment than for other workers selective attrition from the sector masks the causal wage impact unless accounted for by individual fixed effects for low and semi skilled workers effects of new immigration are comparable for natives and older immigrant cohorts consistent with perfect substitutability between native and immigrant labor within trade finally we present evidence that immigration reduces price inflation as price increases over the sample period were significantly lower in activities with growth in the immigrant share than in activities with no or small change in immigrant employment

labor demand and the structure of adjustment costs this study examines the costs firms face in adjusting labor demand to exogenous shocks evidence on monthly plant level data shows that adjustment proceeds in jumps employment is unchanged in response to small shocks but moves instantaneously to a new equilibrium if the shocks are large results in the large literature that assumes smooth adjustment are due to aggregation of this nonlinear relation the finding has implications for cyclical changes in productivity for severance pay layoff and plant closing restrictions and for all other policies that affect the cost of adjusting employment copyright 1989 by american economic association

harvesting and conserving a species when numbers are low population viability and gambler s ruin in bioeconomic models abstract in bioeconomic models of renewable resources population viability is either ignored entirely or the minimum viable population mvp is considered a crisp threshold below which a species is driven to extinction neither is consistent with ecological science the purpose in this paper is firstly to enhance ecological realism in economic models by incorporating insights regarding population viability from conservation biology we consider the effects of chance on optimal management and briefly discuss key results regarding population viability as derived by biologists second as a means to balance interests and morality we suggest a fuzzy compromise between the economist s and the biologist s preferred stock sizes

factor rewards and the international migration of unskilled labor a model with capital mobility abstract conventional economic wisdom holds that the migration of unskilled labor from less developed countries to neighboring developed countries should be expected to narrow the wage gap between those countries and thereby reduce the incentive for further migration if capital is mobile internationally this reasoning may be inappropriate instead emigration of unskilled labor out of the less developed country provides an incentive for capital to leave the country too as a consequence wage rates move in the same direction in each country and the gap between wage rates across countries even may increase

job search and immigrant assimilation an earnings frontier approach this study examines labor market assimilation by measuring the information utilized by immigrants during job search assimilation is assumed to occur whenever such information increases with length of residence in the united states and repeated job searches the authors assert that information utilized during job search reduces differentials between actual and potential maximum attainable earnings coauthors are henry w herzog jr richard a hofler and alan m schlottmann copyright 1992 by mit press

the parallel market of illegal aliens a computational approach abstract this paper develops the notion of illegal aliens as a parallel market in coexistence with the regular market of legal labor in the presence of both price controls on legal labor by minimum wage legislation and quantity controls on illegal aliens by immigration laws illegal aliens involve not only rural urban migration but also tax evasion and deportation costs we develop an analytical equilibrium structure which links markets for legal labor and illegal aliens illustrate how much an equilibrium can be computed and explore some implications of the linkage using united states data

the use of transfer payments by immigrants this paper uses data from the 1976 survey of income and education to compare the receipt of transfers by families headed by male and female immigrants and those headed by native born americans the average level of transfers is found to be considerably higher among families headed by immigrants but this is almost entirely the result of the higher average age of family members among the immigrant group a reflection of the large inflows of immigrants into the u s during the pre 1924 period when age and other factors are held constant immigrant families are found to be considerably less likely to rely on welfare than native families and their receipts from social insurance programs are found to be only slightly higher

debt shifting and ownership structure abstract previous theoretical studies on the debt shifting behavior of multinationals have assumed affiliates of multinationals to be wholly owned we develop a model that allows a multinational firm to determine both the leverage and ownership structure in affiliates endogenously a main finding is that affiliates with minority owners have less debt than wholly owned affiliates and therefore a less tax efficient financing structure this is due to an externality that arises endogenously in our model where costs and benefits of debt shifting are shared asymmetrically between minority and majority owners our findings provide a theory framework for recent empirical findings

double tax discrimination to attract fdi and fight profit shifting the role of cfc rules abstract governments worldwide use targeted tax policies to trade off the gains from increased fdi against the cost of excessive profit shifting by multinational firms we show that nationally optimal tax systems generally incorporate both thin capitalization rules which tax discriminate between purely national and multinational firms and controlled foreign company cfc rules which discriminate between home based and foreign based multinationals in the non cooperative policy equilibrium both thin capitalization rules and cfc rules are set more lenient than if tax policies were chosen cooperatively implying an excessive tax discrimination in favor of multinationals we also analyze the effects of reduced transaction costs for fdi and reduced costs for debt shifting on the optimal policy mix our results correspond to the observed developments of anti avoidance rules in oecd countries

evaluating the effects of ace systems on multinational debt financing and investment abstract theory recommends aligning the tax treatment of debt and equity a few countries notably belgium have introduced an allowance for corporate equity ace to achieve tax neutrality we study the effects of adopting an ace on debt financing passive investment and active investment of multinational firms using high quality administrative data on virtually all german based multinationals we use two main identification strategies based on 1 synthetic control methods and 2 variations across affiliates within the multinational group our results suggest that an ace reduces the corporate debt ratio of multinational affiliates additionally an ace increases intra group lending and other forms of passive investment but has no effects on production investment of multinational affiliates the findings indicate that a unilateral implementation of an ace system generates a tax planning opportunity using a structure combining the benefits from the ace with interest deductions