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Taxation and Foreign Direct Investment in the United States: A Reconsideration of the Evidence

In: Studies in International Taxation

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  • Alan J. Auerbach
  • Kevin Hassett
  • Joel Slemrod

Abstract

Foreign direct investment in the United States boomed in the late 1980s. Some have attributed this rise to the Tax Reform Act of 1986, which by discouraging investment by domestic firms may have provided opportunities for foreign firms not as strongly affected by the U.S. tax changes. We challenge this view on theoretical and empirical grounds, finding that: (1) While the argument applies to new capital investment, the boom was primarily in mergers and acquisitions; (2) While the argument holds primarily for investment in equipment, there was no shift toward the acquisition of equipment-intensive firms, and (3) The FDI boom in the U.S. was really part of a worldwide FDI boom ? the U.S. share of outbound FDI from other countries did not increase during the period 1987-9.

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This chapter was published in:

  • Alberto Giovannini & R. Glenn Hubbard & Joel Slemrod, 1993. "Studies in International Taxation," NBER Books, National Bureau of Economic Research, Inc, number giov93-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7996.

    Handle: RePEc:nbr:nberch:7996

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    1. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: Taxes and Capital Formation, pages 85-92 National Bureau of Economic Research, Inc.
    2. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-62, November.
    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.
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