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The Impact of State Corporate Taxes on FDI Location

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  • Claudio A. Agostini

    (Ilades-Universidad Alberto Hurtado, Santiago, Chile)

Abstract

This article examines the effects of state corporate income taxes on the location of foreign direct investment in the United States, taking into account the endogeneity of taxes and the outside options of investors. States have a set of characteristics that influence investors' decisions; some of them are not observable by a researcher, but states may take them into account when they set taxes. States also can act strategically with respect to other states when setting taxes. Both behaviors bias the estimated tax effects because they create correlation between the error term and the tax rate. I adapt a discrete-choice model of differentiated products to estimate the tax effects. This approach allows me both to control for the outside options of investors and to use instrumental variables to solve the problem of tax endogeneity. I find the tax elasticity to be consistently about —1.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 35 (2007)
Issue (Month): 3 (May)
Pages: 335-360

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Handle: RePEc:sae:pubfin:v:35:y:2007:i:3:p:335-360

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Keywords: foreign direct investment; state corporate income taxes; tax endogeneity;

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References

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  12. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
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Cited by:
  1. Michael Berlemann & Sabine Engelmann & Matthias Göthel & Beate Grundig & Carsten Pohl & Joachim Ragnitz & Heinz Schmalholz, 2008. "Die neuen Bundesländer im internationalen Standortvergleich," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 43.
  2. Michael Berlemann & Jane Tilgner, 2006. "Determinanten der Standortwahl von Unternehmen : ein Literaturüberblick," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 13(06), pages 14-24, December.
  3. Raimund Krumm & Harald Strotmann, 2010. "The Impact of Regional Supply and Demand Conditions on Job Creation and Destruction," IAW Discussion Papers 61, Institut für Angewandte Wirtschaftsforschung (IAW).

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