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Taxation and Foreign Direct Investment Inflows: Time Series Evidence from the US

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  • Albert Wijeweera
  • Don Clark
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    Abstract

    This study investigates long run and short run relationships between the corporate income tax rate and foreign direct investment (FDI) inflows to the US. The tax rate is found to exert a significant negative effect on total FDI and transfer fund inflows in the long run. A 1% decrease in the tax rate would increase total FDI by 2.4% and transfer funds by 4.2%. Collectively, results suggest that the US can use tax policies to attract FDI from abroad. Concern over the possibility of tax competition among countries to attract foreign capital is warranted.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/12265080600715285
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Global Economic Review.

    Volume (Year): 35 (2006)
    Issue (Month): 2 ()
    Pages: 135-143

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    Handle: RePEc:taf:glecrv:v:35:y:2006:i:2:p:135-143

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    Web page: http://www.tandfonline.com/RGER20

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    Related research

    Keywords: Corporate income tax rate; foreign direct investment (FDI); tax rate elasticities; reinvested earnings; transfer funds;

    References

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    1. 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.
    2. Steven Cassou, 1997. "The link between tax rates and foreign direct investment," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1295-1301.
    3. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
    4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    5. Scholes, Myron S & Wolfson, Mark A, 1990. "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," The Journal of Business, University of Chicago Press, vol. 63(1), pages S141-64, January.
    6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    7. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc.
    8. Murthy, N.R. Vasudeva, 1989. "The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States: Some Econometric Comments," National Tax Journal, National Tax Association, vol. 42(2), pages 205-07, June Cita.
    9. Michael J. Boskin & William G. Gale, 1987. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 201-222 National Bureau of Economic Research, Inc.
    10. Joel B. Slemrod, 1990. "Tax Effects on Foreign Direct Investment in the United States: Evidence from a Cross-Country Comparison," NBER Chapters, in: Taxation in the Global Economy, pages 79-122 National Bureau of Economic Research, Inc.
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