While governments
have access to multiple tax instruments, studies of the effect
of tax policy on the location of multinational investment
typically focus exclusively on host country corporate income
tax rates and their interaction with home country tax rules.
This paper examines the impact of indirect (non-income) taxes
on foreign direct investment by American multinational firms,
using confidential affiliate-level data that permit the introduction
of controls for parent companies and host countries. Indirect
tax burdens significantly exceed foreign income tax obligations
for these firms and appear to influence strongly their behavior.
Estimates imply that 10 percent higher indirect tax rates
are associated with 1.3 percent lower assets, 3.1 percent
lower property plant and equipment, and 1.6 percent smaller
trade surplus with parent companies. Corporate income tax
rate differences have comparable effects. The estimated combined
effects of indirect and income taxes are similar to earlier
estimates of investment responses to income taxes, which raises
the possibility that some of the effects commonly attributed
to income taxes also reflect the impact of indirect taxes.
JEL Classification: H87, H25, F23
EM/FIN
39 pages
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