IDEAS home Printed from
   My bibliography  Save this paper

Population Aging, Foreign Direct Investment, and Tax Competition


  • Ronald B Davies

    (University of Oregon and Oxford University Centre for Business Taxation)

  • Robert R Reed III

    (University of Kentucky)


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.

Suggested Citation

  • Ronald B Davies & Robert R Reed III, 2007. "Population Aging, Foreign Direct Investment, and Tax Competition," Working Papers 0710, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:0710

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    2. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
    3. Atkinson, A. B. & Bourguignon, F., 1990. "The design of direct taxation and family benefits," Journal of Public Economics, Elsevier, vol. 41(1), pages 3-29, February.
    4. John Laitner, 1980. ""Rational" Duopoly Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 95(4), pages 641-662.
    5. Gordon, James P. P., 1989. "Individual morality and reputation costs as deterrents to tax evasion," European Economic Review, Elsevier, vol. 33(4), pages 797-805, April.
    6. Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-966, September.
    7. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, vol. 90(3), pages 513-531, February.
    8. Myles, Gareth D. & Naylor, Robin A., 1996. "A model of tax evasion with group conformity and social customs," European Journal of Political Economy, Elsevier, vol. 12(1), pages 49-66, April.
    9. Anderson, Simon P. & Renault, Regis, 2003. "Efficiency and surplus bounds in Cournot competition," Journal of Economic Theory, Elsevier, vol. 113(2), pages 253-264, December.
    10. Lang, Oliver & Nohrba[ss], Karl-Heinz & Stahl, Konrad, 1997. "On income tax avoidance: the case of Germany," Journal of Public Economics, Elsevier, vol. 66(2), pages 327-347, November.
    11. Jesper Roine, 2006. "The political economics of not paying taxes," Public Choice, Springer, vol. 126(1), pages 107-134, January.
    12. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
    13. Chander, Parkash & Wilde, Louis, 1992. "Corruption in tax administration," Journal of Public Economics, Elsevier, vol. 49(3), pages 333-349, December.
    14. Damjanovic, Tatiana, 2005. "Lorenz dominance for transformed income distributions: A simple proof," Mathematical Social Sciences, Elsevier, vol. 50(2), pages 234-237, September.
    15. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association, vol. 53(2), pages 299-322, June.
    16. Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 649-669.
    17. Erard, Brian, 1993. "Taxation with representation : An analysis of the role of tax practitioners in tax compliance," Journal of Public Economics, Elsevier, vol. 52(2), pages 163-197, September.
    18. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
    19. Agell, Jonas & Persson, Mats, 2000. "Tax arbitrage and labor supply," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 3-24, October.
    20. Robson, Arthur J, 1983. "Existence of Consistent Conjectures: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 454-456, June.
    21. Hindriks, Jean & Keen, Michael & Muthoo, Abhinay, 1999. "Corruption, extortion and evasion," Journal of Public Economics, Elsevier, vol. 74(3), pages 395-430, December.
    22. Rainald Borck, 2007. "Voting, Inequality And Redistribution," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 90-109, February.
    23. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-760, October.
    24. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    25. Appelbaum, Elie, 1979. "Testing price taking behavior," Journal of Econometrics, Elsevier, vol. 9(3), pages 283-294, February.
    26. Parkash Chander & Louis L. Wilde, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 165-183.
    27. Kakwani, Nanak C, 1977. "Applications of Lorenz Curves in Economic Analysis," Econometrica, Econometric Society, vol. 45(3), pages 719-727, April.
    28. Pitt, Mark M & Slemrod, Joel, 1989. "The Compliance Cost of Itemizing Deductions: Evidence from Individual Tax Returns," American Economic Review, American Economic Association, vol. 79(5), pages 1224-1232, December.
    29. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," Working Papers 0922, Oxford University Centre for Business Taxation.
    30. Le Breton, Michel & Moyes, Patrick & Trannoy, Alain, 1996. "Inequality Reducing Properties of Composite Taxation," Journal of Economic Theory, Elsevier, vol. 69(1), pages 71-103, April.
    31. Slemrod, Joel, 1995. "Income Creation or Income Shifting? Behavioral Responses to the Tax Reform Act of 1986," American Economic Review, American Economic Association, vol. 85(2), pages 175-180, May.
    32. Yaniv, Gideon, 1990. "Tax evasion under differential taxation : The economics of income source misreporting," Journal of Public Economics, Elsevier, vol. 43(3), pages 327-337, December.
    33. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    34. Scotchmer, Suzanne, 1987. "Audit Classes and Tax Enforcement Policy," American Economic Review, American Economic Association, vol. 77(2), pages 229-233, May.
    35. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association, vol. 57(4), pages 877-899, December.
    36. Keen, Michael & Papapanagos, Harry & Shorrocks, Anthony, 2000. "Tax Reform and Progressivity," Economic Journal, Royal Economic Society, vol. 110(460), pages 50-68, January.
    37. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    38. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 119-128, March.
    39. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-945, December.
    40. Damjanovic, Tatiana, 2001. "The Distributional Component of the Price of the Tax Avoidance Service," SSE/EFI Working Paper Series in Economics and Finance 0454, Stockholm School of Economics, revised 03 Dec 2001.
    41. Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
    42. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    43. Benno Torgler, 2005. "Tax morale in Latin America," Public Choice, Springer, vol. 122(1), pages 133-157, January.
    44. Morton I. Kamien & Nancy L. Schwartz, 1983. "Conjectural Variations," Canadian Journal of Economics, Canadian Economics Association, vol. 16(2), pages 191-211, May.
    45. Brian Erard & Jonathan S. Feinstein, 1994. "Honesty and Evasion in the Tax Compliance Game," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 1-19, Spring.
    46. Cross, Rodney & Shaw, G K, 1982. "On the Economics of Tax Aversion," Public Finance = Finances publiques, , vol. 37(1), pages 36-47.
    47. Une, Masashi & Saijo, Tatsuyoshi, 1995. "On the definition of favorableness," Economics Letters, Elsevier, vol. 47(1), pages 109-110, January.
    48. Charles D. Kolstad & Frank A. Wolak, 1986. "Conjectural Variation and the Indeterminacy of Duopolistic Equilibria," Canadian Journal of Economics, Canadian Economics Association, vol. 19(4), pages 656-677, November.
    49. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
    50. Ulph, David, 1983. "Rational conjectures in the theory of oligopoly," International Journal of Industrial Organization, Elsevier, vol. 1(2), pages 131-154, June.
    51. Kim, Youngse, 2003. "Income distribution and equilibrium multiplicity in a stigma-based model of tax evasion," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1591-1616, August.
    52. Jakobsson, Ulf, 1976. "On the measurement of the degree of progression," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 161-168.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Koethenbuerger, Marko & Stimmelmayr, Michael, 2016. "Taxing multinationals in the presence of internal capital markets," Journal of Public Economics, Elsevier, vol. 138(C), pages 58-71.

    More about this item


    Population Aging; Fiscal Policy; Foreign Direct Investment;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:btx:wpaper:0710. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dongxian Guo). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.