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Population Aging, Foreign Direct Investment, and Tax Competition

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Author Info
Ronald B. Davies () (University of Oregon Economics Department)
Robert R. Reed III () (University of Kentucky Economics Department)

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Abstract

This paper studies the role of population aging for foreign direct investment and the strategic taxation of capital. Importantly, our theoretical model suggests that the labor market implications of aging differ from the financial market aspects. While population aging may be associated with a lower capital stock in the home country and less foreign direct investment, the effects through the labor market and employment tend to generate larger outbound capital flows. To quantify these aspects, we conduct regression analysis to empirically document how population aging affects FDI. To be specific, we use data on both US inbound and outbound FDI. Notably, the estimates between the US and other developed countries conform quite closely to the predictions of our theory. We conclude by studying the strategic taxation of capital. In particular, we examine this issue in light of the fiscal burden associated with older populations. In contrast to previous work on tax competition, we incorporate that old-age transfer programs are generally funded by labor taxes. In this manner, our framework introduces new insights regarding the incentives for governments to restrict capital outflows since doing so increases the labor income tax base used for intergenerational transfers.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2006-16.

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Length: 62
Date of creation: 10 Apr 2003
Date of revision: 10 Jun 2003
Handle: RePEc:ore:uoecwp:2006-16

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Related research
Keywords: Population Aging Fiscal Policy Foreign Direct Investment

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Find related papers by JEL classification:
F20 - International Economics - - International Factor Movements and International Business - - - General
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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    Other versions:
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    Other versions:
  7. Wilson, John Douglas, 1987. "Trade, Capital Mobility, and Tax Competition," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 835-56, August. [Downloadable!] (restricted)
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    Other versions:
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