While governments have multiple tax instruments available to them, studies of the effect of tax policy on the locational decisions of multinationals typically focus exclusively on host country corporate income tax rates and their interaction with home country tax rules. This paper examines the impact of indirect (non-income) taxes on the location and character of foreign direct investment by American multinational firms. Indirect tax burdens significantly exceed foreign income tax obligations for these firms and appear to influence strongly their behavior. The influence of indirect taxes is shown to be partly attributable to the inability of American investors to claim foreign tax credits for indirect tax payments. Estimates imply that 10 percent higher indirect tax rates are associated with 9.2 percent lower reported income of American affiliates and 8.6 percent lower capital/labor ratios. These estimates carry implications for efficient tradeoffs between direct and indirect taxation in raising revenue while attracting mobile capital.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8440.
Length: Date of creation: Aug 2001 Date of revision: Handle: RePEc:nbr:nberwo:8440
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Find related papers by JEL classification: H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Michael P. Devereux & R. Glenn Hubbard, 2000.
"Taxing Multinationals,"
NBER Working Papers
7920, National Bureau of Economic Research, Inc.
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