Accounting
Study questions impact of tax cuts for multinationals on workers
Policies that lower the foreign taxes of U.S.-based multinational corporations are unlikely to benefit domestic workers, according to a recent academic study.
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Employing a dynamic “difference-in-differences” framework, the researchers estimated that local exposure to Check-the-Box significantly reduced domestic employment and earnings. That seems to imply multinational companies substitute domestic with foreign activity in response to lower effective tax rates abroad.
As for the repatriation holiday, they found it “had no effects on labor markets, indicating the foreign cash holdings of U.S.-based MNCs are not an important source of financing for domestic business activity,” wrote the researchers, Daniel Garrett, assistant professor of finance at the Wharton School of the University of Pennsylvania, Eric Ohrn, associate professor of economics at Grinnell College and nonresident senior fellow at the Brookings Institution, and Juan Carlos Suárez Serrato, a professor of economics at Stanford University and a faculty associate at the National Bureau of Economic Research. “We conclude that policies that lower the foreign taxes of US MNCs are unlikely to benefit domestic workers.”
“People have known about Check-the-Box for a long time, and have had different ideas about what it does, or what it could do,” said Garrett. “What we do that’s really different than what people have done before is instead of trying to compare firms to each other based on firm characteristics, we’re trying to compare places in the U.S. that have more employment and firms that benefit from check the box relative to places in the U.S. that have less firms that benefit from check the box.”
They used a local labor markets approach comparing outcomes in more and less exposed domestic markets before and after the provisions are implemented. They determined local exposure to each provision through mapping of the geographic footprints of U.S. multinational corporations across domestic labor markets.
They found that the places in the U.S. with the most exposure to the Check-the-Box rules, by having the most firms operating in 1996 that could benefit from the rules in 1997, experienced substantial declines in employment relative to other places in the U.S. over the next 10 years.
“This is consistent with firms that benefit from Check-the-Box,” said Garrett. “Check-the-Box lowers their foreign effective tax rate by allowing them to engage in new types of profit shifting outside of the U.S. When firms have this opportunity, they’re going to cut U.S. investment activity.”
Multinationals are benefiting in two ways from the tax changes.. “The way we lower foreign effective tax rates for U.S. multinational corporations is we’re making production outside of the U.S. relatively cheaper, and we’re also making those firms generally wealthier,” said Garrett.
Making it cheaper to produce outside of the U.S. can be called the “substitution effect” while making firms wealthier relates to the “income effect.”
“What our paper says is that our results are consistent with the substitution effect dominating the income effect, on average, when U.S. firms face cuts to their foreign taxes,” said Garrett. “Essentially, their U.S. production and their production outside of the U.S. are more substitutable than I think the academic literature has historically recognized.”
This type of profit shifting is being targeted by the Organization for Economic Cooperation and Development’s initiatives to combat corporate tax avoidance, including the Pillar Two part of the plan setting a 15% global minimum income tax on multinational corporations.
“As we move toward a territorial world, there will be benefits to U.S. workers of supporting a global minimum tax,” said Garrett. “When relative taxes are lower in Germany than in the U.S;, we see firms boost their activity in Germany relative to the U.S. It’s very unsurprising that firms will move their production to wherever the after-tax returns are highest. If you change foreign taxes to lower the foreign taxes the firm is paying,”
A global minimum tax under Pillar Two of the OECD’s plan, and the Global Intangible Low Taxed Income, or GILTI, tax regime in the Tax Cuts and Jobs Act, may help U.S. workers by keeping the gap between foreign taxes and domestic taxes relatively smaller, Garrett noted. “At a high level, that kind of substitution across places is substantial for U.S. multinational firms,” he added.
The
As for which corporate tax policies seem to work in encouraging more hiring, he pointed to a previous study he’s done on
“Bonus depreciation in the early and late 2000s was very effective in leading firms to hire more workers to use the machines that they were buying with the bonus depreciation,” said Garrett. “There are ways to get firms to hire more workers. I don’t think that lowering the foreign effective tax rate on firms is one of them.”
Accounting’s AI revolution not only continued into 2024 but actually seemed to accelerate, as it has now become near impossible to go to a conference, sit in a strategy meeting or even shop for new software without hearing those two famous letters, often preceded by the word “generative” and followed by the word “powered” or “driven.” This might seem rather strange, as around this time last year we were marveling at how far AI had come in such a short time, and yet at the end of 2024 we find ourselves in this place once more as the current generation of AI tools makes last year’s seem almost quaint.
This is why, in our second annual AI Thought Leaders Survey, we asked experts in the field what they thought of the past year. The field of AI is both vast and ever-changing, and we wanted to see what people deeply enmeshed in AI in accounting thought of all the changes they’ve seen this year.
Many noted that AI has gone from being a novelty or an experimental tool in many cases to being a practical, widely-adopted technology integral to daily operations. In this respect, even those who may not consider themselves tech-savvy are now using sophisticated AI tools that would have seemed like science fiction as little as ten years ago. Strategic decision-making, advanced analytics, and personalized client interactions are just the tip of the iceberg when it comes to use cases for accountants.
“At the beginning of the year, AI in accounting felt like an emerging trend that many were watching from the sidelines,” said Kacee Johnson, vice president of strategy and innovation at CPA.com, talking about the noticeable shift since then. “It’s no longer just about automation; the conversations have evolved to exploring how AI can enhance advisory roles, improve decision-making, and solve capacity challenges. I’ve seen more professionals embracing AI as a tool they need to understand and leverage, not just something that might affect their work down the line.”
The speed at which AI has advanced this year impressed many, especially its generative capabilities and its application to data both structured and unstructured. In a short time it has transformed workflows, increased productivity, and uncovered new insights their human users had never considered. Meanwhile, the recent rollout of specialized AI agents capable of limited autonomy to handle complex tasks like fraud detection, tax analysis and data reconciliation tells them there’s still so much more to come.
“We have all seen AI advance significantly in the past year, especially in the area of automation of manual tasks. Think about areas like bill pay, invoicing, expense management, financial statement analysis, etc. AI is putting accountants into more strategic roles and getting them out of the trenches in doing the manual tasks. This past year I have seen a number of players in the tax space surface by leveraging AI. Although many of them still continue to be a work in progress, we are going to see AI totally change the tax space and eliminate the massive tech stacks that exist in many firms today,” said Jim Bourke, managing director of Withum’s advisory services.
Of course, all technologies have their risks and AI is no exception. Indeed, as the technology’s presence in firms grows, so too have the concerns about its use. Our experts cited security risks like data breaches and misuse of sensitive information by AI systems, and many were still worried about the accuracy of their outputs given the tendency to “hallucinate” (i.e. making stuff up). But they also raised broader ethical concerns, such as the perpetuation of bias as well as potential job displacement in the short term. Our experts didn’t think AI was going to wholesale replace accountants anytime soon, but some conceded that it would serve to disrupt job dynamics in certain parts of the profession.
“It’s poised to replace certain jobs or at least automate specific tasks within jobs. AI agents will influence particular roles, potentially altering the premium placed on certain skills, leading to some traditional jobs disappearing entirely,” said Prashant Ganti, head of product management in Zoho’s Finance and Operations business unit.
In this, the first of three parts, we look at what our experts—drawn from CPA firms, software vendors and academics all deeply involved in the field of artificial intelligence in the accounting world—thought of three questions:
* How has your perception or impression of AI in accounting changed from the beginning of this year to now?
* What scares you the most about AI today? What is your biggest concern?
* What’s impressed you the most about AI this year? What really got your attention? Both in terms of accounting and overall.
We’ll have more from our experts next week.
Technological competency and outdated provisions are two areas refreshed by
The proposed regulations, if finalized, would amend Circ. 230 “to account for changes in the law and the evolving nature of tax practice.” Among other changes, the proposed regs would remove or update the parts of Circ. 230 related to registered tax preparers and return preparation, as well as contingent fees to reflect changes in the law since the prior amendments to Circ. 230 in 2011 and 2014. The proposed regulations would also revise or eliminate other provisions that are out of date.
The regulations would affect registered tax return preparers, CPAs, Enrolled Agents, enrolled retirement plan agents, enrolled actuaries, Annual Filing Season Program participants, attorneys, appraisers and other practitioners. These regulations propose to:
- Eliminate provisions related to registered tax preparers;
- Classify the use of certain contingent fee arrangements by practitioners as disreputable conduct;
- Establish new standards for appraisals and the disqualification of appraisers;
- Provide rules related to appraisers, including the standards for disqualification; and,
- Update certain provisions.
Additionally, the proposed regulations would incorporate new provisions that require practitioners to maintain technological competency and would clarify some provisions, such as confirming that the IRS Office of Professional Responsibility retains jurisdiction over practitioners who have been suspended or disbarred from practice.
The proposed regs are slated for publication in the Federal Register on Dec. 26.
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