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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

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    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;
    All these keywords.

    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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