Domestic Tax and Outward Foreign Direct Investment: Evidence from Corporate Tax Unification in China
55 Pages Posted: 25 Oct 2018 Last revised: 31 Mar 2019
Date Written: March 30, 2019
We study the effect of domestic tax on firms’ outward foreign direct investment (OFDI) decisions. We exploit a policy change in China that unifies corporate income tax rates through raising foreign firms’ but reducing domestic firms’ tax rates. Using a difference-in-differences estimator that compares the OFDI of foreign and domestic firms before and after the tax unification, we find that a higher domestic corporate income tax rate increased firms’ OFDI but reduced firms’ domestic capital in China and exports from China, which reflect capital relocation from China to overseas countries. This “capital relocation” effect of the domestic tax increase is stronger for firms of higher productivity.
Keywords: Corporate income tax, tax unification, outward FDI, capital relocation
JEL Classification: F21, H25
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