The effects of taxes on direct investment capital outflows are
investigated using a theoretical model which integrates the investment and
financial decisions of the parent and subsidiary. The resulting marginal qs
and costs of capital show that intrsfirm investment allocation and tax
neutrality results critically hinge on the marginal financing regime. By
identifying a channel(s) through which a specific tax policy affects firm
decisions, the model evaluates the combined effects of the home country tax
system on direct investment. Out analysis suggests that while the 1986 U.S.
Tax Reform Act may have an ambiguous effect on the overall level of capital
outflows, it may induce more equipment investments to be undertaken abroad.
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