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The Impact of State Corporate Taxes on FDI Location

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Abstract

This paper examines the effects of state corporate income taxes on the location of foreign direct investment in the U.S., 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 take them into account when they set taxes. States can also act strategically with respect to other states when setting taxes. The former behavior bias the estimated tax effects because it creates correlation between the error term and the tax rate. The latter behavior directly implies an endogenous tax rate. I adapt a discrete choice model of differentiated products to estimate the tax effects. This approach allows me at the same time 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 around -1.

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  • Claudio A. Agostini(Georgetown University/Ilades), 2004. "The Impact of State Corporate Taxes on FDI Location," Working Papers gueconwpa~04-04-10, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~04-04-10
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    Cited by:

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    2. 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.
    3. 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.
    4. 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, October.
    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. Mina Baliamoune-Lutz & Sharon C. Cobb, 2016. "Evolutionary Economic Geography for OFCs: Do Political Ties to the Onshore Reduce Capital Inflow Volatility?," Growth and Change, Wiley Blackwell, vol. 47(4), pages 535-555, December.
    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).

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    More about this item

    Keywords

    Foreign Direct Investment; State Corporate Income Taxes; Tax Endogeneity.;
    All these keywords.

    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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