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Taxation and the Location of U.S. Investment Abroad

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  • Daniel J. Frisch
  • David G. Hartman

Abstract

Tax policy toward the overseas income of U.S. firms is an important issue since foreign investment accounts for a sizabLe fraction of total investment by U.S. firms. At present there is no consensus on the degree to which U.S. firms respond to tax incentives when making international investment decisions. This paper seeks to shed light on this issue. Because the tax systems of (at least) two countries are involved,the specification of tax incentives is far from trivial. For example, U.S.treatment is based on the foreign tax credit mechanism. In its purest form,this mechanism would insure that the net tax rate on all income of U.S. firms would be equal to the U.S. rate, rendering the tax rates in the host countries irrelevant. In fact, actual U.S. tax practice is far removed from an idealized foreign tax credit mechanism. For instance the U.S. tax is not collected until income is repatriated from abroad; section I points out that deferral changes the incentive effects in fundamental ways. Foreign income tax rates definitely do matter in theory; in fact, they may be of overriding importance.The remainder of the paper seeks to test these theoretical considerations. First,we describe the cross-section data that were collected for this purpose. Then, we report the result that U.S. firms respond to net rates of return in general and to properly specified tax rates in particular.

Suggested Citation

  • Daniel J. Frisch & David G. Hartman, 1983. "Taxation and the Location of U.S. Investment Abroad," NBER Working Papers 1241, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1241
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    References listed on IDEAS

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    1. Horst, Thomas, 1972. "Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 258-266, August.
    2. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
    3. Daniel J. Frisch, 1981. "Issues in the Taxation of Foreign Source Income," NBER Working Papers 0798, National Bureau of Economic Research, Inc.
    4. Ladenson, Mark L, 1972. "A Dynamic Balance Sheet Approach to American Direct Foreign Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 531-543, October.
    5. George F. Kopits, 1976. "Taxation and Multinational Firm Behavior: A Critical Survey (L'imposition et le comportement des entreprises multinationales: revue critique) (La tributación y el comportamiento de la empresa multina," IMF Staff Papers, Palgrave Macmillan, vol. 23(3), pages 624-673, November.
    6. Giorgio Ragazzi, 1973. "Theories of the Determinants of Direct Foreign Investment (Théorie des facteurs qui déterminent l'investissement étranger direct) (Teorías de los determinantes de la inversión extranjera directa)," IMF Staff Papers, Palgrave Macmillan, vol. 20(2), pages 471-498, July.
    7. Boatwright, B D & Renton, G A, 1975. "An Analysis of United Kingdom Inflows and Outflows of Direct Foreign Investment," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 478-486, November.
    8. Martin F. J. Prachoway, 1972. "Direct Investment and the Balance of Payments of the United States: A Portfolio Approach," NBER Chapters, in: International Mobility and Movement of Capital, pages 443-464, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Michael J. Boskin & William G. Gale, 1987. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 201-222, National Bureau of Economic Research, Inc.
    2. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    3. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc.

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