Tax Policy and the Efficiency of U.S. Direct Investment Abroad

32 Pages Posted: 2 Jul 2011

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2011

Abstract

Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among “tax expenditures” and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate fewer returns to investors than they absorb in new investment funds. From 1982-2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars; and from 1950-2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160 percent of net investments, implying that foreign investment over these periods was dynamically efficient.

Keywords: International Taxation, Dynamic Efficiency, Deferral

JEL Classification: H25, H21, D92

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Tax Policy and the Efficiency of U.S. Direct Investment Abroad (June 30, 2011). Available at SSRN: https://ssrn.com/abstract=1875750 or http://dx.doi.org/10.2139/ssrn.1875750

Mihir A. Desai

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
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National Bureau of Economic Research (NBER)

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C. Fritz Foley (Contact Author)

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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United States

NBER

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United States

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