This paper examines whether tax-motivated paper shifting reduces the informativeness of aggregate accounting earnings for future GDP growth. Aggregate accounting earnings, especially the earnings of large companies, convey information about future GDP growth. Many large companies are multinational companies (MNCs) whose earnings include domestic and foreign components. I document that aggregate domestic and foreign earnings growth have different associations with future GDP growth. MNCs can shift income by changing where income is reported without changing income-producing activities. Such “paper shifting” distorts the link between reported domestic and foreign accounting earnings and economic activities. I develop a method to identify paper shifting and find paper shifting reduces the ability of aggregate domestic and foreign earnings growth to predict future GDP growth. These findings advance our understanding of the consequences of tax-motivated income shifting and have implications for policymakers considering initiatives to increase tax transparency. In addition, these findings shed light on how to improve GDP growth forecasts, which inform decisions of governments and businesses.
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