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The taxation of discrete investment choices

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  • Michael Devereux

    () (Institute for Fiscal Studies and University of Oxford)

  • Rachel Griffith

    () (Institute for Fiscal Studies and University of Manchester)

Abstract

Traditional analysis of the taxation of income from capital has focused on the impact of tax on marginal investment decisions; the principal impact of tax on investment is through the cost of capital, and is generally measured by an effective marginal tax rate. In this paper, we consider cases in which investors face a choice between two or more mutually exclusive projects, both of which are expected to earn at least the minimum required rate of return. Examples include the location decisions of multinationals, firms’ choice of technology, and the choice of investment projects in the presence of binding financial constraints. In these cases the choice depends on the effective average tax rate. We propose a measure of this rate and demonstrate its relationship to the conventional effective marginal tax rate. Estimates of both are presented and compared for domestic and international investment in Germany, Japan, the UK and USA between 1979 and 1997.

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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W98/16.

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Length: 62 pp.
Date of creation: Dec 1998
Date of revision:
Handle: RePEc:ifs:ifsewp:98/16

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  1. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  2. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  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. Edwards, J S S & Keen, M J, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 211-14, February.
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