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Taxation and the Location of U.S. Investment Abroad

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  • Daniel J. Frisch
  • David G. Hartman
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    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.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1241.

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    Date of creation: Nov 1983
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    Handle: RePEc:nbr:nberwo:1241

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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 258-66, August.
    2. 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 extranjer," IMF Staff Papers, Palgrave Macmillan, vol. 20(2), pages 471-498, July.
    3. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
    4. 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 multi," IMF Staff Papers, Palgrave Macmillan, vol. 23(3), pages 624-673, November.
    5. 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 478-86, November.
    6. 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.
    7. Daniel J. Frisch, 1981. "Issues in the Taxation of Foreign Source Income," NBER Working Papers 0798, National Bureau of Economic Research, Inc.
    8. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 531-43, October.
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    Cited by:
    1. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc.
    2. Michael J. Boskin & William G. Gale, 1986. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Working Papers 1862, National Bureau of Economic Research, Inc.

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