Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25767
Authors: 
Becker, Johannes
Fuest, Clemens
Hemmelgarn, Thomas
Year of Publication: 
2006
Series/Report no.: 
CESifo working paper 1722
Abstract: 
Does the reduction of the effective tax burden on corporations trigger foreign direct investment? We take the German tax reform of 2000 as a natural experiment in order to isolate the impact of corporate taxation on the investment of foreign-held affiliates in Germany. We do so by exploiting the very rich MiDi data base from the Deutsche Bundesbank. Although we deliberately choose an approach which is likely to underestimate the tax effects on investment we find significant evidence that the tax reduction had the intended effect of - ceteris paribus - fostering inward direct investment. We find an elasticity of inward foreign direct investment with respect to the effective marginal tax rate of -0.7. We repeat the analysis for different subgroups and find high degrees of heterogeneity. Our results do not allow to decide whether the model of discrete investment choices or the model of marginal adjustment of the capital stock performs better in explaining the investment data.
JEL: 
H25
H21
Document Type: 
Working Paper

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