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Exports, foreign direct investment, and the costs of corporate taxation

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Abstract

This paper develops a model of a monopolistically competitive industry with extensive and intensive investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm’s capital stock. Extensive investment refers to the firm’s production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the measures of effective marginal and average tax rates and on the elasticities of extensive and intensive investment.

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Authors and Affiliations

  1. CEPR and CESifo, University of St. Gallen (IFF-HSG), Varnbuelstrasse 19, 9000, St. Gallen, Switzerland

    Christian Keuschnigg

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  1. Christian Keuschnigg
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Correspondence to Christian Keuschnigg.

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The paper was presented in 2006 at the German public finance meeting in Giessen; the Institute for Advanced Studies in Vienna; the ESF/CEPR Workshop on Outsourcing, Migration and the European Economy in Rome; the University of St. Gallen; the Graduate Institute for International Studies in Geneva, and in 2007 at the International Monetary Fund in Washington, DC, the CESifo Area Conference in Public Sector Economics in Munich and the 63rd IIPF Congress in Warwick. I appreciate stimulating comments by Michael Devereux and seminar participants and, in particular, by the discussants Andreas Haufler and Nadine Riedl, an anonymous referee and the editor Richard Cornes.

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Keuschnigg, C. Exports, foreign direct investment, and the costs of corporate taxation. Int Tax Public Finance 15, 460–477 (2008). https://doi.org/10.1007/s10797-008-9077-9

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