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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. 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.
  2. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital mobility and tax competition," Munich Reprints in Economics, University of Munich, Department of Economics 20329, University of Munich, Department of Economics.
  3. Stefan Homburg, 2000. "German Tax Reform 2000. Description and Appraisal," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 57(4), pages 504-513, August.
  4. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  5. Joel Slemrod & Marsha Blumenthal & Charles Christian, 2001. "Taxpayer response to an increased probability of audit: Evidence from a controlled experiment in minnesota," Natural Field Experiments, The Field Experiments Website 00332, The Field Experiments Website.
  6. Devereux, Michael P & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3247, C.E.P.R. Discussion Papers.
  7. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 249-275, February.
  8. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  9. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, Elsevier, vol. 34(2-3), pages 489-504, May.
  10. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 800-838, September.
  11. 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, CEPR;CES;MSH, vol. 20(41), pages 52-110, 01.
  12. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  13. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, Elsevier, vol. 68(3), pages 335-367, June.
  14. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1995. "Have Tax Reforms Affected Investment?," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy, Volume 9, pages 131-150 National Bureau of Economic Research, Inc.
  15. Johannes Becker & Clemens Fuest, 2009. "Optimal tax policy when firms are internationallly mobile," Working Papers, Oxford University Centre for Business Taxation 0907, Oxford University Centre for Business Taxation.
  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. 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.
  18. 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.
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Citations

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Cited by:
  1. Ben J. Heijdra & Jenny Ligthart, 2006. "Fiscal Policy, Monopolistic Competition, and Finite Lives," CESifo Working Paper Series 1661, CESifo Group Munich.
  2. 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.
  3. Christina Elschner & Werner Vanborren, 2009. "Corporate Effective Tax Rates in an Enlarged European Union," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 14, Directorate General Taxation and Customs Union, European Commission, revised Apr 2009.
  4. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz, . "Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries," Discussion Papers, University of Nottingham, School of Economics 12/06, University of Nottingham, School of Economics.
  5. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. 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, Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 50-59, October.
  7. Norman Gemmel & Richard Kneller & Danny McGowan & Ismael Sanz, 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European Firms," Working Papers 13001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  8. Michele Bernini & Tania Treibich, 2013. "Killing a Second Bird with One Stone? Promoting Firm Growth and Export through Tax Policy," GREDEG Working Papers, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis 2013-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  9. Doina Maria Rădulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Eine Reformalternative für Deutschland?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, 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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