The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States
Since the passage of the Tax Reform Act of 1986, foreign direct
investment (FDI) both into and from the United States has surged. Inward FDI
reached an all-time high of $58.4 billion in 1988, continuing a secular
increase that began in the late 1970's. Outward FDI also reached an all-time
high of $44.5 billion in 1987 which, contrary to the case of inward FDI,
represented a sharp turnaround from the situation of the early 1980's.
Outward FDI in 1988, though, fell back to $17.5 billion, approximately its
level in 1985 and, after adjusting for capital gains and tax haven
transactions, is lower as a fraction of GNP than it was in the late 1970's.
This paper addresses to what extent tax reform has been responsible for
the surge in FDI, and how it has affected the mix of investment, its
financing, and its timing. The link between tax policy and aggregate FDI is
difficult to make, both because the net incentive effect of several new
provisions is not clear and because it is impossible, with less than three
years of post-TRA86 data, to sort out any tax effect from other influences on
FDI. Several aspects of recent FDI performance are, however, consistent with
the effect of TRA86 on incentives, including the strength of outward FDI to
low-tax countries, and the increase in net transfers of debt abroad. For
inward FDI, the predominance of Japan and U.K. investment, the relative
decline of debt transfers, and the increased reported rate of return are
consistent with changed tax incentives.
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