PART 5: POTENTIAL CONSEQUENCES OF POLICY DECISIONS Katharine Herzog Monique Lucero

Foreign Investment with Regard to the U.S.  Foreign investment by U.S.-headquartered global companies results in:  More U.S. production  Greater U.S. investment  Additional U.S. employment

Part 1: Foreign Direct Investment and Home-Country Activity  Estimated increase in taxes on foreign investment by U.S.-headquartered companies of $122 billion over the next 10 years  Increase in U.S. income taxes by U.S.-headquartered global companies of more than 5.5%  Each investment would be more costly  U.S.-headquartered companies likely to lose market share to foreign competitors  Investor capital would shift toward foreign global companies

 Impeding the global growth of U.S.-headquartered global companies could impair economic growth within the United States  Job losses  Wage cuts  Lower investment = Reduced Tax Revenues Part 1: Foreign Direct Investment and Home-Country Activity

Part 2: Foreign Investment and Domestic Employment  Foreign investment by U.S.-headquartered global companies has positive economic effects within the United States  A10% increase in U.S.-headquartered global companies’ foreign direct investment was associated with…  A 2.6% increase in domestic investment  10% faster foreign sales growth for U.S.- headquartered companies was associated with…  A 6.6% increase in U.S. exports  3.2% more rapid growth in the U.S. parent’s R&D activity

 If U.S. headquartered companies reduce their foreign investments, they would invest more in the U.S.  However, unlikely to happen  The greatest growth opportunities for many businesses are concentrated outside the U.S. so adding barriers would be harmful for business growth  If foreign investment is not seized by U.S. companies mobile capital will be redirected to foreign based companies Part 2: Foreign Investment and Domestic Employment

Part 3: Global Success Driving Domestic Success  If U.S. companies are less competitive in the global markets, foreign companies will seize those markets and grow larger Increased strength and presence in foreign markets will lead to a competitive threat to U.S. domestic markets  With tax disparities a foreign headquartered company would have a tax advantage when acquiring and operating the foreign company With these tax savings for foreign companies it could help fund an acquisition of a U.S. headquartered global business

Conclusion  It is unwise to believe that raising taxes in foreign investments by U.S. based businesses would help or not help the U.S. economy and American workers  Historically, the international sector has been a smaller segment in the U.S. economy and changes are therefore less significant  However, today choices regarding the U.S. international tax policy could have lasting effects