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Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data


  • Johannes Becker
  • Clemens Fuest
  • Thomas Hemmelgarn


Does the reduction of the effective tax burden on corporations trigger foreign direct investment? We take the German tax reform of 2000 as a natural experiment in order to isolate the impact of corporate taxation on the investment of foreign-held affiliates in Germany. We do so by exploiting the very rich MiDi data base from the Deutsche Bundesbank. Although we deliberately choose an approach which is likely to underestimate the tax effects on investment we find significant evidence that the tax reduction had the intended effect of - ceteris paribus - fostering inward direct investment. We find an elasticity of inward foreign direct investment with respect to the effective marginal tax rate of -0.7. We repeat the analysis for different subgroups and find high degrees of heterogeneity. Our results do not allow to decide whether the model of discrete investment choices or the model of marginal adjustment of the capital stock performs better in explaining the investment data.

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  • Johannes Becker & Clemens Fuest & Thomas Hemmelgarn, 2006. "Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data," CESifo Working Paper Series 1722, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1722

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    References listed on IDEAS

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    5. Johannes Becker & Clemens Fuest, 2011. "Optimal tax policy when firms are internationally mobile," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 580-604, October.
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    9. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, vol. 1(1), pages 1-62, December.
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    Cited by:

    1. Alfons J. Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo Group Munich.
    2. repec:ces:ifodic:v:6:y:2008:i:3:p:14567224 is not listed on IDEAS
    3. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz, "undated". "Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries," Discussion Papers 12/06, University of Nottingham, School of Economics.
    4. Christian Baretti & Doina Radulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Deutschlands Antwort auf die Globalisierung - oder doch ein Stückwerk?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 61(02), pages 30-38, January.
    5. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers 12-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Doina Maria Rădulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Eine Reformalternative für Deutschland?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(1), pages 19-36, February.
    7. Christina Elschner & Werner Vanborren, 2009. "Corporate Effective Tax Rates in an Enlarged European Union," Taxation Papers 14, Directorate General Taxation and Customs Union, European Commission, revised Apr 2009.
    8. Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
    9. Michele Bernini & Tania Treibich, 2013. "Killing a Second Bird with One Stone? Promoting Firm Growth and Export through Tax Policy," GREDEG Working Papers 2013-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    10. Christian Baretti & Doina Radulescu & Michael Stimmelmayr, 2008. "The Corporate Tax Reform of 2008: Germany’s Answer to Globalization – or Just Patchwork?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(3), pages 50-59, October.

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