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Estimating Tax-Elasticities of Foreign Direct Investment: The Importance of Tax Havens

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  • Peter Schwarz

    (Jacobs University Bremen)

Abstract

Policy makers are increasingly concerned about the effect of taxes on foreign direct investment (FDI). This study shows that for U.S. multinationals – in line with the findings of the majority of previous studies – a reduction in host country tax rates corresponds with higher FDI-stock. The estimated elasticity suggests that a 1% reduction in host country tax rates leads to an increase of total FDI between 0.3% and 1.8%, depending on the specific tax burden indicator. In addition, it is shown that tax elasticity is lower when solely analyzing investments in production, plant and equipment (PPE). Since the latter approximates more closely the concept of real capital than total FDI stock, this indicates that inter-country competition for real capital is less intense. Finally, the tax coefficient declines and is sometimes insignificant when excluding tax havens from the empirical analysis.

Suggested Citation

  • Peter Schwarz, 2011. "Estimating Tax-Elasticities of Foreign Direct Investment: The Importance of Tax Havens," Economics Bulletin, AccessEcon, vol. 31(1), pages 218-232.
    • Handle: RePEc:ebl:ecbull:eb-10-00527
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    References listed on IDEAS

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    1. de Mooij, Ruud A & Ederveen, Sjef, 2003. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 673-693, November.
    2. Buettner, Thiess, 2002. "The impact of taxes and public spending on the location of FDI: evidence from FDI-flows within Europe," ZEW Discussion Papers 02-17, ZEW - Leibniz Centre for European Economic Research.
    3. Thiess Buettner & Georg Wamser, 2009. "The impact of nonprofit taxes on foreign direct investment: evidence from German multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(3), pages 298-320, June.
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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F2 - International Economics - - International Factor Movements and International Business

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