IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Gradualism in Tax Treaties with Irreversible Foreign Direct Investment

  • Richard Chisik

    ()

    (Florida International University Department of Economics)

  • Ronald B. Davies

    ()

    (University of Oregon Economics Department)

Bilateral international tax treaties govern the host country taxation for the vast majority of the world’s foreign direct investment (FDI). Of particular interest is the fact that the tax rates used under these treaties are gradually falling although the treaties themselves do not specify any such reductions. Since there is no outside governing agency to redress treaty violations, such reductions must be both mutually beneficial and self-enforcing. Furthermore, the optimal tax rates must be less than those initially set, otherwise no reductions would be necessary. To explain such behavior, we model a two-country setting with two-way capital flows. In particular, only part of FDI is immediately reversible. As the extent of irreversibility increases, the likelihood of Pareto optimal tax rates obtaining as a self-enforcing outcome in the initial period is reduced. More modest tax reductions, from the non-treaty levels, are still possible. These limited tax reductions generate an increase in bilateral FDI. As countries increase the stock of capital in one another, further reductions in taxes become self-enforcing. Depending on the extent of irreversibility and asymmetry, Pareto optimal tax rates may be obtainable in the long run. Thus, the amount of inbound investment a country can attract may be related to the commitment to which its outbound investment binds it. This final insight provides an additional rationale for the observed pattern of capital flows in which those countries with the greatest outbound capital flows are also those with the highest inbound flows.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://economics.uoregon.edu/papers/UO-2000-3_Chisik_Tax_Treaties.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Bill Harbaugh)


Download Restriction: no

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2000-3.

as
in new window

Length: 39
Date of creation: 01 Jun 2000
Date of revision: 01 Jun 2002
Handle: RePEc:ore:uoecwp:2000-3
Contact details of provider: Postal: 1285 University of Oregon, 435 PLC, Eugene, OR 97403-1285
Phone: (541) 346-4661
Fax: (541) 346-1243
Web page: http://economics.uoregon.edu/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. James R. Markusen & Keith E. Maskus, 1999. "Multinational Firms: Reconciling Theory and Evidence," NBER Working Papers 7163, National Bureau of Economic Research, Inc.
  2. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, vol. 87(3), pages 400-420, June.
  3. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer, vol. 11(5), pages 601-622, 09.
  4. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
  5. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
  6. Chisik, Richard, 2003. "Gradualism in free trade agreements: a theoretical justification," Journal of International Economics, Elsevier, vol. 59(2), pages 367-397, March.
  7. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December.
  8. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, vol. 26(1-2), pages 77-97, February.
  9. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  10. Janeba,Eckhard, 1991. "Corporate income tax competition,Double taxation treaties, and foreign direct investment," Discussion Paper Serie A 361, University of Bonn, Germany.
  11. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  12. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-76, August.
  13. Lapan, Harvey E., 1988. "The Optimal Tariff, Production Lags and Time Consistency," Staff General Research Papers 10816, Iowa State University, Department of Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ore:uoecwp:2000-3. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bill Harbaugh)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.