New Results on the Effects of Tax Policy on the International Location of Investment

31 Pages Posted: 19 Jun 2004 Last revised: 7 Aug 2010

See all articles by Michael J. Boskin

Michael J. Boskin

Stanford University - The Hoover Institution on War, Revolution and Peace; National Bureau of Economic Research (NBER)

William G. Gale

Brookings Institution

Date Written: March 1986

Abstract

We study the effects of tax laws on foreign direct investment (FDI) and direct investment abroad (DIA), distinguishing in each case between investment financed by retained earnings and investment financed by transfers from abroad. We find that tax policy, through its effect on the rate-of-return available in the U.S., has an important effect on the international location of investment. FDI in the U.S. is very sensitive to after-tax rates-of-return available here. U.S. direct investment abroad is also affected, although to a lesser extent. We use these estimates to examine the effects of the 1981-82 tax changes on the international location of investment. We estimate that the tax changes lowered annual DIA by $0.5 billion to $1.0 billion (2% to 4% of its 1980 value), and raised annual FDI by $2 billion to $4 billion (11% of 20% of its 1980 value). We also discuss the welfare effects of tax policy toward international investment. Our results suggest that the tax effects on the international location of investment are important. Tax policies, such as ACRS andthe ITC, which raise the after tax rate-of-return on new investment without losing revenue from previous investment, not only stimulate domestic fixed investment, but also attract additional investment from abroad. The additional investment supplements the domestic investment impact on productivity and raises corporate tax revenue. However, our results should be taken as preliminary estimates, not as definitive statements about the long-run impacts of tax policy.

Suggested Citation

Boskin, Michael J. and Gale, William G., New Results on the Effects of Tax Policy on the International Location of Investment (March 1986). NBER Working Paper No. w1862. Available at SSRN: https://ssrn.com/abstract=341822

Michael J. Boskin (Contact Author)

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States
(650) 723-6482 (Phone)
(650) 723-6494 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

William G. Gale

Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6148 (Phone)
202-797-6181 (Fax)

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