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New Results on the Effects of Tax Policy on the International Location of Investment


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  • Michael J. Boskin
  • William G. Gale


We study the effects of tax laws on foreign direct investment (FDI) and direct investment abroad (DIA), distinguishing in each case between investment financed by retained earnings and investment financed by transfers from abroad. We find that tax policy, through its effect on the rate-of-return available in the U.S., has an important effect on the international location of investment. FDI in the U.S. is very sensitive to after-tax rates-of-return available here. U.S. direct investment abroad is also affected, although to a lesser extent. We use these estimates to examine the effects of the 1981-82 tax changes on the international location of investment. We estimate that the tax changes lowered annual DIA by $0.5 billion to $1.0 billion (2% to 4% of its 1980 value), and raised annual FDI by $2 billion to $4 billion (11% of 20% of its 1980 value). We also discuss the welfare effects of tax policy toward international investment. Our results suggest that the tax effects on the international location of investment are important. Tax policies, such as ACRS andthe ITC, which raise the after tax rate-of-return on new investment without losing revenue from previous investment, not only stimulate domestic fixed investment, but also attract additional investment from abroad. The additional investment supplements the domestic investment impact on productivity and raises corporate tax revenue. However, our results should be taken as preliminary estimates, not as definitive statements about the long-run impacts of tax policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1862.

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Date of creation: Jan 1988
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Publication status: published as Boskin, Michael J. and William G. Gale. "New Results on the Effects of Tax Policy on the International Location of Investment," The Effects of Taxation on Capital Accumulation,ed. by Martin Feldstein, Chicago: UCP, 1987.
Handle: RePEc:nbr:nberwo:1862

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  1. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
  2. 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.
  3. Lawrence H. Goulder & John B. Shoven & John Whalley, 1982. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium," NBER Working Papers 0919, National Bureau of Economic Research, Inc.
  4. Guy V. G. Stevens, 1972. "Capital Mobility And The International Firm," NBER Chapters, in: International Mobility and Movement of Capital, pages 323-366 National Bureau of Economic Research, Inc.
  5. Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
  6. Lawrence H. Goulder & John B. Shoven & John Whalley, 1983. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium Tax Analysis Model," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 333-368 National Bureau of Economic Research, Inc.
  7. Hartman, David G., 1980. "The effects of taxing foreign investment income," Journal of Public Economics, Elsevier, vol. 13(2), pages 213-230, April.
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