Department of Economics

The Impacts of Various Taxes on Foreign Direct Investment

Department of Economics
University of Delaware
Working Paper #2011-18

The Impacts of Various Taxes on Foreign Direct Investment

Stacie Beck and Alexis Chaves

ABSTRACT

Previous work on the effect of taxes on foreign direct investment (FDI) focused primarily on capital income taxes. We investigate the proposition that other forms of taxation may also deter FDI. We use tax ratios, i.e., average effective tax rates, on consumption, labor and capital income for a panel of 25 OECD countries from 1975-2006. We find that increases in relative tax rates on capital income encourage net FDI outflow whereas increases in labor income tax rates have the opposite effect. Increases in relative consumption tax rates have insignificant impacts.

JEL Codes:F21, H20, C33

Keywords:  Tax Ratio, Foreign Direct Investments

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