Foreign Direct Investment in a World of Multiple Taxes

49 Pages Posted: 26 Aug 2001 Last revised: 23 Oct 2010

See all articles by Mihir A. Desai

Mihir A. Desai

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

James R. Hines Jr.

University of Michigan; NBER

Date Written: August 2001

Abstract

While governments have multiple tax instruments available to them, studies of the effect of tax policy on the locational decisions of multinationals typically focus exclusively on host country corporate income tax rates and their interaction with home country tax rules. This paper examines the impact of indirect (non-income) taxes on the location and character of foreign direct investment by American multinational firms. Indirect tax burdens significantly exceed foreign income tax obligations for these firms and appear to influence strongly their behavior. The influence of indirect taxes is shown to be partly attributable to the inability of American investors to claim foreign tax credits for indirect tax payments. Estimates imply that 10 percent higher indirect tax rates are associated with 9.2 percent lower reported income of American affiliates and 8.6 percent lower capital/labor ratios. These estimates carry implications for efficient tradeoffs between direct and indirect taxation in raising revenue while attracting mobile capital.

Suggested Citation

Desai, Mihir A. and Hines, James Rodger, Foreign Direct Investment in a World of Multiple Taxes (August 2001). NBER Working Paper No. w8440. Available at SSRN: https://ssrn.com/abstract=281070

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James Rodger Hines

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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