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The Impact of State Corporate Taxes on FDI Location

Author

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  • Claudio A. Agostini

    (Ilades-Universidad Alberto Hurtado, Santiago, Chile)

Abstract

This article examines the effects of state corporate income taxes on the location of foreign direct investment in the United States, taking into account the endogeneity of taxes and the outside options of investors. States have a set of characteristics that influence investors' decisions; some of them are not observable by a researcher, but states may take them into account when they set taxes. States also can act strategically with respect to other states when setting taxes. Both behaviors bias the estimated tax effects because they create correlation between the error term and the tax rate. I adapt a discrete-choice model of differentiated products to estimate the tax effects. This approach allows me both to control for the outside options of investors and to use instrumental variables to solve the problem of tax endogeneity. I find the tax elasticity to be consistently about —1.

Suggested Citation

  • Claudio A. Agostini, 2007. "The Impact of State Corporate Taxes on FDI Location," Public Finance Review, , vol. 35(3), pages 335-360, May.
  • Handle: RePEc:sae:pubfin:v:35:y:2007:i:3:p:335-360
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    References listed on IDEAS

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    Cited by:

    1. Agostini, Claudio, 2010. "Differential fuel taxes and their effects on automobile demand," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    2. Michael Berlemann & Sabine Engelmann & Matthias Göthel & Beate Henschel & Carsten Pohl & Joachim Ragnitz & Heinz Schmalholz, 2008. "Die neuen Bundesländer im internationalen Standortvergleich," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 43.
    3. Michael Berlemann & Jane Tilgner, 2006. "Determinanten der Standortwahl von Unternehmen : ein Literaturüberblick," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(06), pages 14-24, December.
    4. Eda Balýkçýoðlu & Baþak Dalgýc & Burcu Fazlýoðlu, 2016. "Does Foreign Capital Increase Tax Revenue: The Turkish Case," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 776-781.
    5. Raimund Krumm & Harald Strotmann, 2013. "The impact of regional location factors on job creation, job destruction and employment growth in manufacturing," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 33(1), pages 23-48, February.
    6. repec:bla:growch:v:47:y:2016:i:4:p:535-555 is not listed on IDEAS
    7. Raimund Krumm & Harald Strotmann, 2010. "The Impact of Regional Supply and Demand Conditions on Job Creation and Destruction," IAW Discussion Papers 61, Institut für Angewandte Wirtschaftsforschung (IAW).

    More about this item

    Keywords

    foreign direct investment; state corporate income taxes; tax endogeneity;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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