The effects of company taxation in EU accession countries on German FDI1

This article investigates how company taxation affects German foreign direct investment (FDI) in European Union (EU) accession countries. In 2004 and 2007, 10 former socialist eastern European countries joined the EU. Although the EU integration is associated with increasingly favourable investment conditions, accession countries also pursue active strategies to attract foreign firms. In particular, taxes on corporate income have been significantly reduced during the last decade. We analyse whether corporate tax policies of eastern European countries affect three aspects of multinational activity: the location decision, the investment decision and the capital structure choice. The results suggest that local taxes are negatively related to both location and investment decisions. The analysis of the capital structure confirms that higher local taxes imply higher debt‐to‐capital ratios.     

The Determinants of Location Choices of China's ODI: Institutions,Taxation and Resources

China has become the third largest source of outward direct investment (ODI). This paper studies how institutions in the host countries affect the location choices of China’s ODI. Based on a deal-level sample from 2002–2011, this paper empirically tests how political institutions, political stability, government effectiveness, regulatory quality, rule of law and contrd of corruption in the host countries affect the location choices of China’s ODI. On top of these institutional factors, we study the effects of tax evasion and natural resources in host countries, and their interactions with institutional factors. We find that political institutions in the host countries are not major concerns of the ODI, while government effectiveness, regulatory quality, and control of corruption have significant effects on the locations of ODI. In addition, China’s ODI tends to avoid countries with strict legal systems. Tax evasion and resources are also major motives of China’s ODI. General institutional quality and tax evasion are substitutes in China’s ODI location decisions.     

Domestic Effects of Offshoring High‐skilled Jobs: Complementarities in Knowledge Production

We provide evidence on how changes in the use of high‐skilled workers (inventors) in a foreign location affect a firm's domestic use of the same type of worker. We exploit rich data that provide variation in the location of inventors within multinational firms across industries and countries to control for confounding firm–time and industry factors. We find that a 10% increase in the use of foreign inventors leads to a 1.9% increase in the use of domestic inventors. Our results suggest that foreign and domestic inventors are complementary in the production of knowledge.     

Demand and distance: Evidence on cross-border shopping

An important issue for commodity taxation is the extent to which changes in foreign taxes affect the extent of cross-border shopping and thereby, domestic tax revenue. We use data from Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location’s distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.3 in the border region; moving 150 (400) km inland reduces the cross-price elasticity to 0.2 (0.1). Our estimates suggest that a recent Danish cut in the spirits tax reduced Swedish tax revenues from spirits sales by more than 2%, and that an attempt by Sweden to cut taxes in response would reduce tax revenues further.     

Output‐based rebating of carbon taxes in a neighbour's backyard: Competitiveness,leakage and welfare

We investigate how, in an open economy, carbon taxes combined with output‐based rebating (OBR) perform in interaction with the carbon policies of a large neighbouring trading partner. Analytical results suggest that, whether the purpose of the OBR policy is to compensate firms for carbon tax burdens or to maximize welfare (accounting for global emission reductions), the OBR rate should be positive in policy‐relevant cases. Numerical simulations for Canada, with the US as the neighbouring trading partner, indicate that the impact of US policies on the OBR rate will depend crucially on the purpose of the Canadian OBR policies. If, for a given US carbon policy, Canada's aim is to restore the competitiveness of domestic emission‐intensive and trade‐exposed (EITE) firms to the same level as before the introduction of its own carbon taxation, we find that the necessary domestic OBR rates will be insensitive to the foreign carbon policies. However, if not only the Canadian carbon tax but also an equally high US tax is introduced, compensatory Canadian OBR rates will be up to 50% lower, depending on the sector and on US OBR policy. If the policy objective is to increase economy‐wide allocative efficiency (welfare) of Canadian policies by accounting for carbon leakage, the US policies will have only a minor downward pressure on desirable OBR rates in Canada. Practical choices of OBR rates hardly affect overall domestic economic performance; thus, output‐based rebating qualifies as an instrument for compensating EITE industries without a large sacrifice in terms of economy‐wide allocative efficiency.     

Federal TAX Competition – How does the Institutional Structure of a Country change Tax Outcomes?

The interrelations of taxation and federal structure have been extensively analysed from various perspectives. The present paper looks at two competing countries of different institutional structures. It examines how the tax rates set at each level of both countries vary in a given setting, when a federal and a unitary country compete for mobile tax base, or both countries are organised as federations. The paper discusses whether or not tax rates set in every jurisdiction will be too high or too low in equilibrium. The externalities triggered by a tax regime change are analysed and the respective impact on revenues is considered. The results essentially hinge on the relative strategic interaction of tax rates, as well as the elasticity of the tax base with respect to the tax rate.     

Location decisions of non‐bank financial foreign direct investment: Firm‐level evidence from Europe

The non‐bank financial sector in Europe has more than doubled in size between 2005 and 2015 reflecting the substantial growth in shadow banking activities. However, a large proportion of the non‐bank financial sector that remains unmapped as granular balance sheet information is not available for over half of the sector. Motivated by these data gaps and employing firm‐level data, this paper examines the location decisions of newly incorporated foreign affiliates in the non‐bank financial sector across 27 European countries over the period 2004 to 2012. The probability of a country being chosen as the location for a new foreign affiliate is found to be negatively associated with higher corporate tax rates and geographic distance but increases with the size and financial development of the host country. The financial regulatory regime in the host country and gravity related controls such as the home and host country sharing a common legal system, language, border, and currency are also found to impact the likelihood of non‐bank financial FDI.     

Tax competition for foreign direct investments and the nature of the incumbent firm

We investigate tax/subsidy competition for foreign direct investments (FDI) between countries of different size when a domestic firm is the incumbent in the largest market and we study how the nature (public or private) of the incumbent firm affects policy competition. We show that, differently from the case of a private firm, the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare‐maximizing firm. We also show that the public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare‐maximizing location. An efficiency‐enhancing role of policy competition may then arise only when the domestic incumbent is a private firm, whereas tax competition is always wasteful in the presence of a public firm.     

Profit-shifting from Czech multinational companies to European tax havens

Although tax havens have been affecting other countries for decades, only in recent years have the associated challenges been subject to intensive scrutiny in both research and policy areas. We contribute to the growing evidence of corporate tax base erosion and profit-shifting by testing multinational companies’ ownership links to individual tax havens rather than to groups of them, as is the case with most previous research. Our company-level analysis suggests that profit shifts through debt financing from the Czech Republic to Luxembourg, Switzerland and, to a lesser extent, the Netherlands. We have ascertained that tax havens are not limited to tiny islands and may actually be found among European countries. We also provide rough estimates of the impact of this profit-shifting on tax revenues as well as a policy recommendation.     

International Commodity Taxation under Monopolistic Competition

We analyze non‐cooperative commodity taxation in a two‐country trade model characterized by monopolistic competition and international firm and capital mobility. In this setting, taxes in one country affect foreign welfare through the relocation of mobile firms and through changes in the rents accruing to capital owners. With consumption‐based taxation, these fiscal externalities exactly offset each other and the non‐cooperative tax equilibrium is Pareto efficient. With production‐based taxation, however, there are additional externalities on the foreign tax base and the foreign price level that lead non‐cooperative tax rates to exceed their Pareto efficient levels.     

Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens

A tax competition model is presented to investigate the effects of tax havens on the public good provision. We show that when countries facing a rise in tax havens change their tax enforcement strategies in response, the existence of tax havens may result in a higher level of equilibrium public good provision as compared to the case with no tax havens. Accordingly, tax havens could be welfare enhancing for non‐haven countries. This result offers a possible explanation for the recent empirical evidence that the corporate tax revenues in high‐tax countries have actually increased with the growth in the flow of foreign direct investment to tax havens.     

Taxes,institutions and foreign diversification opportunities

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). The worldwide tax regime employed by the US potentially distorts this choice by penalizing FDI, relative to FPI, in low-tax countries. On the other hand, weak investor protections in foreign countries may increase the value of control, creating an incentive to use FDI rather than FPI. By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflects these incentives to bypass home and host country institutional regimes. The results suggest that the residual tax on US multinational firms' foreign earnings skews the composition of outbound capital flows — a 10% decrease in a foreign country's corporate tax rate increases US investors' equity FPI holdings by approximately 10%, controlling for effects on FDI. Investor protections also seem to shape portfolio choices, though these results are not robust when only within-country variation is employed.     

PROFIT TAX AND FIRM MOBILITY IN A THREE‐COUNTRY MODEL

We construct a three‐country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms‐of‐trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three‐country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar‐thy‐neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.     

POSITIONAL CONCERNS IN AN OLG MODEL: OPTIMAL LABOR AND CAPITAL INCOME TAXATION*

This article concerns optimal income taxation under asymmetric information in a two‐type OLG model when individuals’ relative consumption matters. Positional concerns affect the policy choices via two channels: (i) the average degree of positionality and (ii) positionality differences between the low‐ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate of the low‐ability type becomes substantially smaller, than in the conventional model. In addition to measures of reference consumption based on average consumption, we also address within‐generation and upward comparisons.     

Predicting FDI inflows: Exploring a nonlinear relationship between peace years,oil wealth,and the rule of law

Despite previous studies investigating the impacts of various factors such as peace years, natural resources, and the rule of law on foreign direct investment (FDI), empirical findings remain inconclusive. Therefore, this study investigates the interplay between these factors in shaping host country conditions that facilitate FDI inflows. Using generalized additive models, we examine the simultaneous effects of peace years, oil wealth, and the rule of law on FDI inflows in a sample of non-OECD countries from 1970 to 2009. Our results reveal that established peace is a critical factor in attracting FDI inflows for both oil-exporting and non-oil-exporting countries. However, the effects of the rule of law vary depending on oil wealth. Oil-exporting countries receive more FDI inflows when they have a weak rather than a strong rule of law, while non-oil-exporting countries tend to receive more foreign investments when they have a moderately strong rule of law. We argue that countries with oil wealth combined with a moderately weak rule of law provide an environment that is conducive to multinational corporations (MNCs) in extractive industries seeking monopoly rents. Conversely, countries without oil wealth should create stable yet efficient environments that protect property rights and promote labor market flexibility to appeal to non-resource-seeking MNCs.     

Deterrence and knowledge of the law: The case of drunk driving

While it is necessary that researchers make choices in order to estimate inequality, the reasons for the measurement choices and their impact on inequality estimates have not been widely assessed. This paper uses Canadian data from the 1980s to analyse whether inequality estimates are sensitive to common measurement choices. Seemingly minor technical choices about the treatment of outlying observations, such as the use of top-income coded data, exclusion of very high and low observations, and differences among data sets in the capture of very high observations affect estimates of inequality. Further, the impact of the treatment of outlying observations on inequality estimates are at least as large as the impact of measurement choices of a conceptual nature, such as the income definition and population selection. The sensitivity of inequality estimates to measurement choices, which often remain invisible, affect inferences about the relative degree of inequality at a given point in time among countries and changes over time.     

Strategic Environmental Policies when Waste Products are Tradable

The paper deals with international trade in hazardous waste products when there is an international oligopoly market for waste, and both waste‐importing and waste‐exporting countries act strategically to utilize national environmental policies to attach rents arising from trade in waste. The authors model a multiple‐stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less‐developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax. In the market for waste, an oligopolistic supply is assumed. The demand for waste is perfectly competitive, with waste‐processing firms guided by marginal disposal costs and environmental taxes levied by foreign countries. With each country playing Nash, the analysis finds domestic and foreign taxes to be distorted from the Pigouvian taxes in such a way that the domestic (waste‐exporter) tax rate is set below, and the foreign tax rate is set above, the Pigouvian taxes. However, a global welfare optimum requires tax distortions in the opposite direction, in the sense that foreign environmental taxes must be set below the Pigouvian tax rate.     

Need,Merit and Politics in Multilateral Aid Allocation: A District‐level Analysis of World Bank Projects in India

We assess the targeting of foreign aid within recipient countries by employing Poisson estimations on the determinants of the World Bank's allocation of project aid at the district level in India. The evidence of needs‐based location choices is very weak as long as the poverty orientation of overall commitments is taken as the yardstick. It is only for some sectors that we find stronger indications of needs‐based allocation when combining sector‐specific commitments with corresponding measures of need. The evidence for a merit‐based allocation of World Bank aid is even weaker. We typically do not find evidence that aid allocation is affected by political patronage at the state or district level. However, the World Bank prefers districts where foreign direct investors may benefit from projects related to infrastructure.     

Do low corporate income tax rates attract FDI? – Evidence from Central- and East European countries

Fifty six bilateral country relationships combining 7 home countries from the EU and the US, and 8 Central and East European host countries (CEECs) of foreign direct investment (FDI) from 1995-2003 are used in a panel gravity-model setting to estimate the role of taxation as a determinant of FDI. While gravity variables explain most of the variation of FDI inflows, the bilateral effective average tax rate (beatr) is roughly equally important to other cost-related factors. The semi-elasticity of FDI with respect to taxes is about -4.3. This value is above those of earlier studies in absolute terms and can partly be attributed to using the beatr instead of the statutory tax rate. Our results indicate that tax-lowering strategies of CEEC governments seem to have an important impact on foreign firms location decisions.     

Labor Taxation and Foreign Direct Investment*

In this paper, we analyze the implications of the effective taxation of labor for profits and, hence, the decisions made by multinational enterprises concerning the location of their headquarters. If a higher employee‐borne tax burden reduces manager effort, it should also negatively affect firm profits and the location of the headquarters. We compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages. Our findings suggest that higher employee‐borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy.