New Results on the Effects of Tax Policy on the International Location of Investment
31 Pages Posted: 19 Jun 2004 Last revised: 5 Aug 2022
Date Written: March 1986
Abstract
We study the effects of tax laws on foreign direct investment (FDI) and direct investment abroad (DIA), distinguishing in each case between investment financed by retained earnings and investment financed by transfers from abroad. We find that tax policy, through its effect on the rate-of-return available in the U.S., has an important effect on the international location of investment. FDI in the U.S. is very sensitive to after-tax rates-of-return available here. U.S. direct investment abroad is also affected, although to a lesser extent. We use these estimates to examine the effects of the 1981-82 tax changes on the international location of investment. We estimate that the tax changes lowered annual DIA by $0.5 billion to $1.0 billion (2% to 4% of its 1980 value), and raised annual FDI by $2 billion to $4 billion (11% of 20% of its 1980 value). We also discuss the welfare effects of tax policy toward international investment. Our results suggest that the tax effects on the international location of investment are important. Tax policies, such as ACRS andthe ITC, which raise the after tax rate-of-return on new investment without losing revenue from previous investment, not only stimulate domestic fixed investment, but also attract additional investment from abroad. The additional investment supplements the domestic investment impact on productivity and raises corporate tax revenue. However, our results should be taken as preliminary estimates, not as definitive statements about the long-run impacts of tax policy.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Fiscal Paradise: Foreign Tax Havens and American Business
By James R. Hines Jr. and Eric M. Rice
-
Altered States: Taxes and the Location of Foreign Direct Investment in America
-
Tax Policy and Foreign Direct Investment in the United States
-
Coming Home to America: Dividend Repatriations by U.S. Multinationals
-
Taxation and Foreign Direct Investment: A Synthesis of Empirical Research
By Ruud A. De Mooij and Sjef Ederveen
-
Income Shifting in U.S. Multinational Corporations
By David Harris, Randall Morck, ...