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Quality versus Quantity – The Composition Effect of Corporate Taxation on Foreign Direct Investment

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  • Johannes Becker
  • Clemens Fuest

Abstract

This paper studies corporate taxation in a model where foreign investment of firms may affect the profitability of the investor firm’s domestic activities. In this framework, corporate taxes distort the quality, not just the quantity of foreign direct investment flows. High-tax countries may see their tax revenues decrease in response to inbound foreign direct investment. Our results also imply that empirical studies on international profit shifting may overestimate the role of profit shifting. Observed profitability differences between high and low tax countries may be due to project selection. Empirical evidence in support of the main hypotheses is provided using aggregate investment and tax revenue data from a sample of OECD countries.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-10/cesifo1_wp2126.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2126.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2126

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Keywords: corporate taxation; foreign direct investment;

References

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  1. Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6048, C.E.P.R. Discussion Papers.
  2. Huizinga, H.P. & Nielsen, S.B., 1995. "Capital income and profits taxation with foreign ownership of firms," Discussion Paper, Tilburg University, Center for Economic Research 1995-82, Tilburg University, Center for Economic Research.
  3. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2006. "Capital Structure and International Debt Shifting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5882, C.E.P.R. Discussion Papers.
  4. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262633078, December.
  5. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, now publishers, vol. 1(1), pages 1-62, December.
  6. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2005. "Foreign Direct Investment and Domestic Economic Activity," NBER Working Papers 11717, National Bureau of Economic Research, Inc.
  7. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 149-82, February.
  8. Barba Navaretti, Giorgio & Castellani, Davide, 2004. "Investments Abroad and Performance at Home: Evidence from Italian Multinationals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4284, C.E.P.R. Discussion Papers.
  9. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  10. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 103-120, Spring.
  11. 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.
  12. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, Elsevier, vol. 88(6), pages 1065-1091, June.
  13. Mihir C. Desai & C. Fritz Foley & James R. Hines Jr., 2005. "Foreign Direct Investment and the Domestic Capital Stock," NBER Working Papers 11075, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Dischinger, Matthias, 2007. "Profit Shifting by Multinationals: Indirect Evidence from European Micro Data," Discussion Papers in Economics, University of Munich, Department of Economics 2029, University of Munich, Department of Economics.
  2. Becker, Johannes & Fuest, Clemens, 2011. "Tax competition -- Greenfield investment versus mergers and acquisitions," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 41(5), pages 476-486, September.
  3. Andreas Haufler & Frank Stähler, 2013. "Tax Competition In A Simple Model With Heterogeneous Firms: How Larger Markets Reduce Profit Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 665-692, 05.
  4. Johannes Becker & Clemens Fuest & Nadine Riedel, 2010. "Corporate tax effects on the quality and quantity of FDI," Working Papers, Oxford University Centre for Business Taxation 1013, Oxford University Centre for Business Taxation.
  5. Dischinger, Matthias, 2008. "Profit Shifting by Multinationals and the Ownership Share: Evidence from European Micro Data," Discussion Papers in Economics, University of Munich, Department of Economics 5661, University of Munich, Department of Economics.
  6. Ernst, Christof & Richter, Katharina & Riedel, Nadine, 2013. "Corporate taxation and the quality of research and development," FZID Discussion Papers 66-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  7. Matthias Dischinger & Nadine Riedel, 2009. "There's no Place like Home: The Profitability Gap between Headquarters and their Foreign Subsidiaries," CESifo Working Paper Series 2866, CESifo Group Munich.
  8. Johannes Becker & Clemens Fuest, 2007. "Corporate Tax Policy and International Mergers and Acquisitions – Is the Tax Exemption System Superior?," CESifo Working Paper Series 1884, CESifo Group Munich.
  9. Christoph Ernst & Katharina Richter & Nadine Riedel, 2013. "Corporate taxation and the quality of research & development," Working Papers, Oxford University Centre for Business Taxation 1301, Oxford University Centre for Business Taxation.
  10. Dischinger, Matthias, 2010. "Multinational Enterprises and Corporate Taxation," Munich Dissertations in Economics, University of Munich, Department of Economics 11147, University of Munich, Department of Economics.

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