Working Paper: NBER ID: w3042
Authors: Joel Slemrod
Abstract: This paper investigates how the tax system of the U.S. and the capital-exporting country combine to affect the flow of foreign direct investment (FDI) into the U.S. First, using aggregate data, it corroborates earlier work suggesting that the U.S. effective tax rate does influence the amount of FDI financed by transfers of funds, but not the amount financed by retained earnings. The data are then disaggregated by major capital-exporting countries to see if, as theory would suggest, FDI from countries which exempt foreign-source income from taxation is more sensitive to U.S. tax rates than FDI from countries which attempt to tax foreign-source income. The data analysis does not reveal a clear differential responsiveness between these two groups of countries, suggesting either difficulties in accurately measuring effective tax rates or the availability of financial strategies which render the home country tax system immaterial in affecting the return on FDI.
Keywords: Foreign Direct Investment; Taxation; Cross-Country Comparison
JEL Codes: F21; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US effective tax rate (H26) | FDI financed by transfers of funds (F21) |
| US effective tax rate (H26) | FDI financed by retained earnings (F23) |
| Territorial tax systems (H29) | responsiveness of FDI to US tax rates (F23) |
| US effective tax rate (H26) | FDI from countries with territorial tax systems (F21) |