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How taxation affects foreign direct investment (country - specific evidence)

  • Joosung Jun
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    The author estimates empirically the degree to which the tax systems of both home and host countries affect foreign direct investment (FDI). He presents evidence that tax rules significantly affect capital flow fromFDI. Home country taxes in particular appear to significantly affect the behavior of FDI. By identifying the incentives associated with different tax parameters in the home and host countries, the author identifies different channels through which taxes affect FDI. The home-country statutory tax rate is claimed to measure the incentive effect of potential home-country surtaxes on new FDI; the home-country effective tax rate is shown to measure how taxes affect the substitution of investment in one country for investment in another. The host country's effective tax rate should represent either the incentives for FDI in that country or simply the amount of foreign tax payments that are creditable against the home tax liability on the FDI. The most robust of the statistical results - using data on investment in the United States by ten other countries between 1980 and 1989 - shows that the home-country statutory tax rate significantly hurts FDI when the country makes foreign-source income subject to home-country taxation. (The same variable has no significant effect on FDI from those countries that exempt foreign-source income from home-country taxation.) The author found that the coefficient of the home country's statutory and effective tax rates take the opposite sign in the estimated equations; this supports the presence of different channels through which home country tax systems influence FDI. The weak performance of the host-country tax variable in the estimated equations suggests that the host-country tax does not affect decisions about where to invest FDI as much as is conventionally perceived. The host country tax largely represents credible foreign taxes for many investors.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1307.

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    Date of creation: 30 Jun 1994
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    Handle: RePEc:wbk:wbrwps:1307
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    1. Auerbach, A.J. & Hines, Jr.J.R., 1988. "Investment Tax Incentives And Frequent Tax Reforms," Papers 135, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    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. 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.
    5. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
    6. Slemrod, J., 1989. "Tax Effects Of Foreign Direct Investment In The U.S.: Evidence From A Cross-Country Comparison," Working Papers 254, Research Seminar in International Economics, University of Michigan.
    7. Joosung Jun, 1989. "Tax Policy and International Direct Investment," NBER Working Papers 3048, National Bureau of Economic Research, Inc.
    8. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, May.
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