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Gradualism In Tax Treaties With Irreversible Foreign Direct Investment

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Author Info
Richard Chisik
Ronald B. Davies

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bruce Blonigen & Ronald Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," Asia-Pacific Financial Markets, Springer, vol. 11(5), pages 601-622, September. [Downloadable!] (restricted)
    Other versions:
  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. [Downloadable!]
  3. Ronald Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," Asia-Pacific Financial Markets, Springer, vol. 11(6), pages 775-802, November. [Downloadable!] (restricted)
    Other versions:
  4. 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, Economics Bulletin, vol. 6(34), pages 1-10. [Downloadable!]
  5. Davies, Ronald B., 2003. "Tax Treaties, Renegotiations, and Foreign Direct Investment," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(2), pages 251-273, September. [Downloadable!]
    Other versions:
  6. Richard A. Chisik & Ronald B. Davies, 2003. "Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence," Working Papers 0309, Florida International University, Department of Economics. [Downloadable!]
    Other versions:
  7. 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. [Downloadable!]
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