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Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data

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  • Johannes Becker
  • Clemens Fuest
  • Thomas Hemmelgarn

Abstract

Does the reduction of the effective tax burden on corporations trigger foreign direct investment? We take the German tax reform of 2000 as a natural experiment in order to isolate the impact of corporate taxation on the investment of foreign-held affiliates in Germany. We do so by exploiting the very rich MiDi data base from the Deutsche Bundesbank. Although we deliberately choose an approach which is likely to underestimate the tax effects on investment we find significant evidence that the tax reduction had the intended effect of - ceteris paribus - fostering inward direct investment. We find an elasticity of inward foreign direct investment with respect to the effective marginal tax rate of -0.7. We repeat the analysis for different subgroups and find high degrees of heterogeneity. Our results do not allow to decide whether the model of discrete investment choices or the model of marginal adjustment of the capital stock performs better in explaining the investment data.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1722.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1722

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Keywords: corporate taxation; foreign direct investment;

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References

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  1. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital mobility and tax competition," Munich Reprints in Economics 20329, University of Munich, Department of Economics.
  2. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, vol. 34(2-3), pages 489-504, May.
  3. Johannes Becker & Clemens Fuest, 2011. "Optimal tax policy when firms are internationally mobile," International Tax and Public Finance, Springer, vol. 18(5), pages 580-604, October.
  4. 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.
  5. Claudia M. Buch & Jörn Kleinert & Alexander Lipponer & Farid Toubal, 2005. "Determinants and effects of foreign direct investment: evidence from German firm-level data," Economic Policy, CEPR & CES & MSH, vol. 20(41), pages 52-110, 01.
  6. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  7. Johannes Becker & Clemens Fuest, 2004. "A Backward Looking Measure of the Effective Marginal Tax Burden on Investment," CESifo Working Paper Series 1342, CESifo Group Munich.
  8. Stefan Homburg, 2000. "German Tax Reform 2000. Description and Appraisal," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 504-513, August.
  9. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
  10. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1995. "Have Tax Reforms Affected Investment?," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 131-150 National Bureau of Economic Research, Inc.
  11. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, vol. 10(2), pages 107-26, March.
  12. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March.
  13. Christopher House & Matthew D. Shapiro, 2006. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," NBER Working Papers 12514, National Bureau of Economic Research, Inc.
  14. 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.
  15. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  16. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
  17. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  18. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
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Citations

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Cited by:
  1. Michele Bernini & Tania Treibich, 2013. "Killing a Second Bird with One Stone? Promoting Firm Growth and Export through Tax Policy," GREDEG Working Papers 2013-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
  3. Christian Baretti & Doina Maria Radulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Deutschlands Antwort auf die Globalisierung - oder doch ein Stückwerk?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(02), pages 30-38, 01.
  4. Heijdra, B.J. & Ligthart, J.E., 2005. "Fiscal Policy, Monopolistic Competition and Finite Lives," Discussion Paper 2005-126, Tilburg University, Center for Economic Research.
  5. Christina Elschner & Werner Vanborren, 2009. "Corporate Effective Tax Rates in an Enlarged European Union," Taxation Papers 14, Directorate General Taxation and Customs Union, European Commission, revised Apr 2009.
  6. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers 12-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz, . "Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries," Discussion Papers 12/06, University of Nottingham, School of Economics.
  8. Christian Baretti & Doina Maria Radulescu & Michael Stimmelmayr, 2008. "The Corporate Tax Reform of 2008: Germany’s Answer to Globalization – or Just Patchwork?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 50-59, October.
  9. Doina Maria Rădulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Eine Reformalternative für Deutschland?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(1), pages 19-36, 02.
  10. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo Group Munich.

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