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U.S. Tax Policy and Direct Investment Abroad

  • Joosung Jun
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    The analysis presented in this paper shows that u.s. tax policy can have significant effects on u.s. direct investment outflows through various channels. It is stressed that a sensible choice of specification and data in an empirical model entails a rigorous examination of the theoretical underpinnings behind the model. In particular, we emphasize the difference between foreign fixed investment undertaken by the foreign subsidiary and direct investment of the entire international firm, and the need to use different theoretical frameworks in each case. We present estimated equations relating the balance of payments direct investment outflows -- distinguishing between retained Subsidiary earnings and parent transfers -- to various measures of the u.s. net rate of return and the cost of funds. The evidence shows that u.s. tax policy toward domestic investment has an important effect on direct investment outflows by influencing the relative net rate of return between the U.S. and abroad. We estimate that a 16 cent reduction in transfers made by U.S. parents firms occurs for every dollar increase in U.S. domestic investment. In contrast to previous studies, transfers equations fit much better than retained earnings equations for every net return variable used in our estimation. Of the various specifications tested, the transfers equation containing a marginal, forward-looking and corporate-investor net return variable fits best, a result which is consistent with the predictions of our theoretical framework.

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    File URL: http://www.nber.org/papers/w3049.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3049.

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    Date of creation: Jul 1989
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    Publication status: published as Taxation in the Global Economy, ed. by Assaf Razin and Joel Slemrod, University of Chicago Press, 1990.
    Handle: RePEc:nbr:nberwo:3049
    Note: PE
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-47, December.
    2. Robert E. Lipsey & Mario Schimberni & Robert V. Lindsay, 1988. "Changing Patterns of International Investment in and by the United States," NBER Chapters, in: The United States in the World Economy, pages 475-558 National Bureau of Economic Research, Inc.
    3. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    4. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-89, June.
    5. Michael J. Boskin & William G. Gale, 1986. "New Results on the Effects of Tax Policy on the International Location of Investment," NBER Working Papers 1862, National Bureau of Economic Research, Inc.
    6. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
    7. David G. Hartman, 1981. "Domestic Tax Policy and Foreign Investment: Some Evidence," NBER Working Papers 0784, National Bureau of Economic Research, Inc.
    8. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    9. Giovannini, Alberto, 1988. "International Capital Mobility and Tax Evasion," CEPR Discussion Papers 231, C.E.P.R. Discussion Papers.
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