Corporate tax effects on the quantity and quality of FDI

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 05.05.2009, 12:15 - 13:30

   

Presentation by 

Clemens Fuest (Ifo Institute for Economic Research)
   

Abstract:

This paper measures the relative importance of quality and quantity effects of corporate taxation on foreign direct investment. Taxes reduce the equilibrium stock of foreign capital in a given country (quantity effect) and decrease the extent to which investment contributes to the corporate tax base (quality effect). We build a model with heterogeneous investment projects in order to analyse the interdependent effects of taxes on investment quantity and quality. The model predictions are tested using data from a large sample of European multinationals. We find that the quality effect accounts for almost half of the total effect of taxes on the size of the tax base. An important implication is that governments should not only care about the size of inbound FDI flows also about its specific characteristics.

   
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