The impact of U.S. tax reform on foreign direct investment in the United States

Abstract This study empirically examines how taxes shape foreign direct investment, and finds that increased taxes spur inward foreign investment. This finding conforms with theories that recognize that foreign investor response is critically shaped by the tax provisions faced by the foreign investor in his home country, and by the effects of tax reform on pre-tax asset returns. We demonstrate that average tax rates may better proxy tax effects than do effective tax rates. Our findings are more robust than previous results since we utilize the entire 1980s tax history, consider a fuller set of industry distinctions, and estimate the tax responsiveness in the context of exchange-rate fluctuations.

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