Advanced Search
MyIDEAS: Login to save this article or follow this journal

FDI determination and corporate tax competition in a volatile world

Contents:

Author Info

  • Mauro Ghinamo
  • Paolo Panteghini

    ()

  • Federico Revelli

Abstract

This paper investigates the role of economic and political voltility in the process of corporate tax rate determination. Based on a theoretical framework that allows for the ability of multinational firms to choose the optimal timing of foreign investment and to shift profits by transfer pricing, the paper provides an empirical analysis on a large panel data set of countries over the 1983-2003 period. First, a reduced-form dynamic equation of corporate tax rate determination is estimated by generalized method of moments (GMM), where a country's top statutory corporate tax rate depends on a number of measures of economic and political volatility. Our results support the hypothesis that economic volatility is associated with lower top statutory corporate tax rates, while our measures of political volatility have no significant impact on corporate taxation policy. In order to identify the channels through which volatility works, we estimate a structural model allowing for simultaneous determination of the corporate tax rate and the inflow of FDIs to a country, and we are able to show that economic volatility affects the corporate tax setting process through its impact on FDI inflows.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1007/s10797-009-9127-y
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 17 (2010)
Issue (Month): 5 (October)
Pages: 532-555

as in new window
Handle: RePEc:kap:itaxpf:v:17:y:2010:i:5:p:532-555

Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Corporate tax rates; Profit shifting; Tax competition; C23; F23; H87;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Kangoh Lee, 2004. "Taxation of Mobile Factors as Insurance under Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 253-271, 06.
  2. Cherian, Joseph A & Perotti, Enrico C, 1999. "Option Pricing and Foreign Investment under Political Risk," CEPR Discussion Papers 2327, C.E.P.R. Discussion Papers.
  3. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  4. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  6. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  7. Mills, Lillian F. & Newberry, Kaye J., 2004. "Do Foreign Multinationals’ Tax Incentives Influence Their U.S. Income Reporting and Debt Policy?," National Tax Journal, National Tax Association, vol. 57(1), pages 89-107, March.
  8. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
  9. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Munich Reprints in Economics 20408, University of Munich, Department of Economics.
  10. César Calderón & Luis Servén, 2005. "The Effects of Infrastructure Development on Growth and Income Distribution," DEGIT Conference Papers c010_056, DEGIT, Dynamics, Economic Growth, and International Trade.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  12. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
  13. Bretschger, Lucas & Hettich, Frank, 2000. "Globalisation, capital mobility and tax competition: Theory and evidence for OECD countries," Wirtschaftswissenschaftliche Diskussionspapiere 07/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  14. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
  15. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
  16. Paolo Panteghini & Guttorm Schjelderup, 2006. "To Invest or not to Invest: A real options approach to FDIs and tax competition," International Tax and Public Finance, Springer, vol. 13(6), pages 643-660, November.
  17. Benjamin Lockwood & Marko Köthenbürger, 2007. "Does Tax Competition Really Promote Growth?," CESifo Working Paper Series 2102, CESifo Group Munich.
  18. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete over Corporate Tax Rates?," CEPR Discussion Papers 3400, C.E.P.R. Discussion Papers.
  19. Mihir A. Desai & C. Fritz Foley, 2004. "The Comovement of Returns and Investment Within the Multinational Firm," NBER Working Papers 10785, National Bureau of Economic Research, Inc.
  20. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
  21. Richard Chisik & Ronald B. Davies, 2010. "Gradualism in Tax Treaties with Irreversible Foreign Direct Investment," Working Papers 019, Ryerson University, Department of Economics.
  22. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  23. Ronald B. Davies and Johannes Voget, 2009. "Tax Competition in an Expanding European Union," The Institute for International Integration Studies Discussion Paper Series iiisdp276, IIIS.
  24. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  25. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September.
  26. Petroulas, Pavlos, 2007. "The effect of the euro on foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1468-1491, August.
  27. Paolo M. Panteghini, 2004. "Wide versus Narrow Tax Bases under Optimal Investment Timing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 482-, December.
  28. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  29. 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.
  30. Paolo Panteghini, 2006. "The Capital Structure of Multinational Companies Under Tax Competition," Working Papers ubs0606, University of Brescia, Department of Economics.
  31. Katheryn N. Russ & Thomas A. Lubik, 2006. "Entry, Multinational Firms, and Exchange Rate Volatility," Working Papers 622, University of California, Davis, Department of Economics.
  32. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  33. Ruud de Mooij & S. Ederveen, 2001. "Taxation and foreign direct investment; a synthesis of empirical research," CPB Discussion Paper 3, CPB Netherlands Bureau for Economic Policy Analysis.
  34. Andreas Haufler & Alexander Klemm & Guttorm Schjelderup, 2006. "Globalisation and the Mix of Wage and Profit Taxes," CESifo Working Paper Series 1678, CESifo Group Munich.
  35. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  36. Michael Overesch & Johannes Rincke, 2009. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," CESifo Working Paper Series 2535, CESifo Group Munich.
  37. Craig Brett & Joris Pinkse, 2000. "The determinants of municipal tax rates in British Columbia," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 695-714, August.
  38. Haufler, A. & Schjelderup, G., 1999. "Corporate Tax Systems and Cross Country Profit Shifting," Papers 1/99, Norwegian School of Economics and Business Administration-.
  39. Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer, vol. 12(5), pages 667-687, September.
  40. Lee, Young & Gordon, Roger H., 2005. "Tax structure and economic growth," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1027-1043, June.
  41. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  42. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
  43. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
  44. Chen, Cherry C. & So, Raymond W., 2002. "Exchange rate variability and the riskiness of US multinational firms: evidence from the Asian financial turmoil," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 411-428.
  45. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
  46. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 148(2), pages 269-295, June.
  47. Joshua Aizenman & Nancy Marion, 2001. "The Merits of Horizontal versus Vertical FDI in the Presence of Uncertainty," NBER Working Papers 8631, National Bureau of Economic Research, Inc.
  48. Kelejian, Harry H. & Prucha, Ingmar R., 2002. "2SLS and OLS in a spatial autoregressive model with equal spatial weights," Regional Science and Urban Economics, Elsevier, vol. 32(6), pages 691-707, November.
  49. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
  50. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
  51. Mihir A. Desai, 2003. "The Divergence between Book Income and Tax Income," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 169-208 National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:kap:itaxpf:v:17:y:2010:i:5:p:532-555. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.