Tax Effects on Foreign Direct Investment in the United States: Evidencefrom a Cross-Country Comparison
This paper investigates how the tax system of the U.S. and the capital-
exporting country combine to affect the flow of foreign direct investment
(FDI) into the U.S. First, using aggregate data, it corroborates earlier work
suggesting that the U.S. effective tax rate does influence the amount of FDI
financed by transfers of funds, but not the amount financed by retained
earnings. The data are then disaggregated by major capital-exporting
countries to see if, as theory would suggest, FDI from countries which exempt
foreign-source income from taxation is more sensitive to U.S. tax rates than
FDI from countries which attempt to tax foreign-source income. The data
analysis does not reveal a clear differential responsiveness between these two
groups of countries, suggesting either difficulties in accurately measuring
effective tax rates or the availability of financial strategies which render
the home country tax system immaterial in affecting the return on FDI.
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