Estimating Tax-Elasticities of Foreign Direct Investment: The Importance of Tax Havens.

Policy makers are increasingly concerned about the effect of taxes on foreign direct investment (FDI). This study shows that for U.S. multinationals – in line with the findings of the majority of previous studies – a reduction in host country tax rates corresponds with higher FDI-stock. The estimated elasticity suggests that a 1 % reduction in host country tax rates leads to an increase of total FDI between 0.3 % and 1.8%, depending on the specific tax burden indicator. In addition, it is shown that tax elasticity is lower when solely analyzing investments in production, plant and equipment (PPE). Since the latter approximates more closely the concept of real capital than total FDI stock, this indicates that inter-country competition for real capital is less intense. Finally, the tax coefficient declines and is sometimes insignificant when excluding tax havens from the empirical analysis. I thank one anonymous referee for very useful suggestions. Financial support from “Deutsche Forschungsgemeinschaft ” during my research stay at the Collaborative Research Center “Transformations of the State ” at Jacobs University Bremen is gratefully acknowledged