Working Paper: NBER ID: w3048
Authors: Joosung Jun
Abstract: The effects of taxes on direct investment capital outflows are investigated using a theoretical model which integrates the investment and financial decisions of the parent and subsidiary. The resulting marginal qs and costs of capital show that intrafirm investment allocation and tax neutrality results critically hinge on the marginal financing regime. By identifying a channel(s) through which a specific tax policy affects firm decisions, the model evaluates the combined effects of the home country tax system on direct investment. Out analysis suggests that while the 1986 U.S. Tax Reform Act may have an ambiguous effect on the overall level of capital outflows, it may induce more equipment investments to be undertaken abroad.
Keywords: tax policy; direct investment; international capital flows
JEL Codes: H25; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax policy (H20) | direct investment capital outflows (F21) |
| tax treatment of foreign source income (F21) | firm's financial decisions regarding investment locations (G11) |
| domestic tax policy (H29) | relative net profitability of investments in different countries (F23) |
| lower tax rates in host countries (H29) | attract more foreign investment (F21) |
| tax policy (H20) | cost of raising external funds (G32) |
| reduction in domestic corporate tax rates (H29) | local borrowing in host countries more attractive for subsidiaries (F23) |