Corporate Tax Reform and Foreign Direct Investment in Germany - Evidence from Firm-Level Data

38 Pages Posted: 1 Jun 2006

See all articles by Johannes Becker

Johannes Becker

University of Cologne

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Thomas Hemmelgarn

European Commission

Date Written: May 2006

Abstract

Does the reduction of the effective tax burden on corporations trigger foreign direct investment? We take the German tax reform of 2000 as a natural experiment in order to isolate the impact of corporate taxation on the investment of foreign-held affiliates in Germany. We do so by exploiting the very rich MiDi data base from the Deutsche Bundesbank. Although we deliberately choose an approach which is likely to underestimate the tax effects on investment we find significant evidence that the tax reduction had the intended effect of - ceteris paribus - fostering inward direct investment. We find an elasticity of inward foreign direct investment with respect to the effective marginal tax rate of -0.7. We repeat the analysis for different subgroups and find high degrees of heterogeneity. Our results do not allow to decide whether the model of discrete investment choices or the model of marginal adjustment of the capital stock performs better in explaining the investment data.

Keywords: corporate taxation, foreign direct investment

JEL Classification: H25, H21

Suggested Citation

Becker, Johannes and Fuest, Clemens and Hemmelgarn, Thomas, Corporate Tax Reform and Foreign Direct Investment in Germany - Evidence from Firm-Level Data (May 2006). CESifo Working Paper Series No. 1722. Available at SSRN: https://ssrn.com/abstract=905754

Johannes Becker

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Clemens Fuest (Contact Author)

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Thomas Hemmelgarn

European Commission ( email )

J-79 05/230
Brussels, Brussels B-1049
Belgium

HOME PAGE: http://https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation_en

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