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Taxes, Leverage and the National Return on Outbound Foreign Direct Investment

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  • Martin Feldstein

Abstract

The effect of outbound foreign direct investment (FDI) on the national income of the parent firm's country depends on the relative importance of two countervailing factors: the loss of tax revenue to the foreign government and the increased use of foreign debt. The present paper develops an explicit analysis of these two factors in the context of the segmented international capital market in which most national saving remains in the country in which the saving is done. The analysis is applied with realistic parameter values for U.S. outbound foreign direct investment. The calculations imply that an increase in outbound FDI raises the present value of U.S. national income by a rather substantial amount. Traditional analyses that conclude that the foreign tax credit causes excess outbound FDI fail to take into account the fact that firms that invest abroad increase their use of foreign debt as they increase the extent of their FDI.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4689.

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Date of creation: Mar 1994
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Publication status: published as "Taxes, Leverage and the National Return on Foreign Direct Investment," in Essays in Honor of Erich Streissler, F. Baltzarek, F. Butschek, and G. Tichy (eds.), Von der Theorie zur Wirtschafspoltick - ein osterreichischer Weg. Stuttgart: Lucius & Lucius, 1998, pp 304-319.
Handle: RePEc:nbr:nberwo:4689

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  1. 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.
  2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 314-29, June.
  3. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  4. Murray C. Kemp, 1962. "Foreign Investment And The National Advantage," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 38(81), pages 56-62, 03.
  5. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1076-94, December.
  6. Robert E. Lipsey, 1994. "Outward Direct Investment and the U.S. Economy," NBER Working Papers 4691, National Bureau of Economic Research, Inc.
  7. Martin S. Feldstein, 1995. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 43-66 National Bureau of Economic Research, Inc.
  8. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc.
  9. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
  10. Dutton, John, 1982. "The Optimal Taxation of International Investment Income: A Comment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(2), pages 373-80, May.
  11. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc.
  12. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
  13. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
  14. Feldstein, Martin & Hartman, David, 1979. "The Optimal Taxation of Foreign," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 613-29, November.
  15. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 376-89, June.
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Cited by:
  1. Curcuru, Stephanie E. & Thomas, Charles P. & Warnock, Francis E., 2013. "On returns differentials," Journal of International Money and Finance, Elsevier, Elsevier, vol. 36(C), pages 1-25.
  2. John Howe, 1994. "Internationalisation, Trade and Foreign Direct Investment," RBA Annual Conference Volume, Reserve Bank of Australia, in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
  3. Willie Lahari, 2010. "Permanent and Transitory Shocks among Pacific Island Economies - Prospects for a Pacific Islands Currency Union," Working Papers, University of Otago, Department of Economics 1001, University of Otago, Department of Economics, revised Feb 2010.
  4. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2013. "On Returns Differentials," NBER Working Papers 18866, National Bureau of Economic Research, Inc.
  5. Stephanie E. Curcuru & Charles P. Thomas, 2012. "The return on U.S. direct investment at home and abroad," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1057, Board of Governors of the Federal Reserve System (U.S.).
  6. Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(10), pages 1527-1546, October.
  7. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 130(4), pages 675-697, December.
  8. Stephanie E. Curcuru & Charles P. Thomas, 2014. "The Return on U.S. Direct Investment at Home and Abroad," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy National Bureau of Economic Research, Inc.
  9. Tomáš Evan, 2010. "Some Issues of Political Economics of Multinational Corporations," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(4), pages 32-43.
  10. Feldstein, Martin, 1995. "Fiscal policies, capital formation, and capitalism," European Economic Review, Elsevier, Elsevier, vol. 39(3-4), pages 399-420, April.

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