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Gradualism In Tax Treaties With Irreversible Foreign Direct Investment

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  • Richard Chisik
  • Ronald B. Davies

Abstract

Bilateral tax treaties govern host country taxation for most of the world's foreign direct investment (FDI). To explain why the tax rates used under these treaties are gradually falling we consider two-way capital flows with irreversible FDI. The extent of irreversibility determines the magnitude of initial tax reductions. When Pareto-optimal taxes are not initially self-enforcing, more modest tax reductions generate an increase in irreversible bilateral FDI so that further tax reductions become self-enforcing. Depending on the extent of irreversibility and asymmetry, Pareto-optimal tax rates may be obtainable in the long run. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 45 (2004)
Issue (Month): 1 (02)
Pages: 113-139

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Handle: RePEc:ier:iecrev:v:45:y:2004:i:1:p:113-139

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  8. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer, vol. 11(5), pages 601-622, 09.
  9. Lapan, Harvey E., 1988. "The Optimal Tariff, Production Lags and Time Consistency," Staff General Research Papers 10816, Iowa State University, Department of Economics.
  10. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
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Cited by:
  1. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers 2009/37, Institut d'Economia de Barcelona (IEB).
  2. Rixen, Thomas & Rohlfing, Ingo, 2005. "The Political Economy of Bilateralism and Multilateralism: Institutional Choice in Trade and Taxation," MPRA Paper 325, University Library of Munich, Germany, revised 2005.
  3. Richard Chisik, 2010. "Trade Disputes, Quality Choice, and Economic Integration," Working Papers 022, Ryerson University, Department of Economics.
  4. Wacker, Konstantin M., 2013. "On the measurement of foreign direct investment and its relationship to activities of multinational corporations," Working Paper Series 1614, European Central Bank.
  5. Daniel Millimet & Abdullah Kumas, 2007. "Reassessing the Effects of Bilateral Tax Treaties on US FDI Activity," Departmental Working Papers 0704, Southern Methodist University, Department of Economics.
  6. Rixen, Thomas & Rohlfing, Ingo, 2005. "The political economy of bilateralism and multilateralism: Institutional choice in international trade and taxation," TranState Working Papers 31, University of Bremen, Collaborative Research Center 597: Transformations of the State.
  7. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2007. "FDI Determination and Corporate Tax Competition in a Volatile World," CESifo Working Paper Series 1965, CESifo Group Munich.
  8. Ronald B. Davies, 2003. "Tax Treaties, Renegotiations, and Foreign Direct Investment," University of Oregon Economics Department Working Papers 2003-14, University of Oregon Economics Department, revised 10 Jun 2003.
  9. Matthew Cole & M. Ryan Haley & Aaron Lowen, 2008. "A note on bilateral trade agreements in the presence of irreversible investment and deferred negotiations," Economics Bulletin, AccessEcon, vol. 6(34), pages 1-10.
  10. repec:ebl:ecbull:v:6:y:2008:i:34:p:1-10 is not listed on IDEAS
  11. Egger, Peter & Pfaffermayr, Michael, 2004. "The impact of bilateral investment treaties on foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 788-804, December.

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