Margarita López Forero

Monday, Februray 13, 2023 — 12:00-01:00pm

Room 115, MSE

Aggregate Labor Share and Tax Havens: things are not always what they seem

Margarita López Forero

(Post-doc, Université Paris Saclay – Evry)

We use French firm-level data to study the role of multinational enterprises’ (MNEs) presence in tax havens in determining the dynamics of the aggregate labor share and therefore, income inequalities between workers and capitalists. Given these firms’ weight in the economy, we find that tax haven presence of MNEs accounts for a 7.3% of the observed increase in the aggregate share of labor in France between 1997-2014. Implementing a difference-in-differences we analyze the effect of firm entry in tax havens on firms’ labor share of value added and each of its components. We find that average firm labor share in France experiences an increase by 2.3% over the immediate years following the establishment in a tax haven. We argue that the labor share of MNEs with presence in tax havens is overestimated given that tax optimization partly consists in artificially shifting profits to low tax jurisdictions, thus underestimating domestic value added, which experiences an average drop by 10.2%. Indeed, the labor share increases even if its numerator, total wage bill, decreases on average by 8.2% when MNEs enter a tax haven. Additionally, the total wage bill drop is explained by a strong decline in employment (-7.7%) rather than a decline on average firm wages, on which there is no statistically significant effect. Finally, we implement a panel event study design to show that our estimates capture the tax haven entry effect and not differential trends between treated and control units.

Link to the paper