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Tax Policy and the Efficiency of U.S. Direct Investment Abroad

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Listed author(s):
  • Mihir A. Desai
  • C. Fritz Foley
  • James R. Hines Jr.

Abstract

Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982-2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950-2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160 percent of net investments, implying that foreign investment over these periods was dynamically efficient.

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File URL: http://www.nber.org/papers/w17202.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17202.

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Date of creation: Jul 2011
Publication status: published as Desai, Mihir A. & Foley, C. Fritz & Hines, James R. Jr., 2011. "Tax Policy And The Efficiency Of U.S. Direct Investment Abroad," National Tax Journal, National Tax Association, vol. 64(4), pages 1055-82, December .
Handle: RePEc:nbr:nberwo:17202
Note: CF ITI PE
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Find related papers by JEL classification:
  • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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  1. Grubert, Harry, 2001. "Enacting Dividend Exemption and Tax Revenue," National Tax Journal, National Tax Association, vol. 54(4), pages 811-827, December.
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Cited by:

  1. Faulkender, Michael & Smith, Jason M., 2016. "Taxes and leverage at multinational corporations," Journal of Financial Economics, Elsevier, vol. 122(1), pages 1-20.

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