Advertisement

International Tax and Public Finance

, Volume 10, Issue 2, pp 127–145 | Cite as

Tax Competition and Foreign Capital

  • Ronald B. Davies
  • Thomas A. Gresik
Article

Abstract

This paper derives welfare equivalence of double taxation rules in a tax competition model with discriminatory home taxes and the ability to finance subsidiary operations with host country capital. For a more general model, we provide sufficient conditions on the number of host sectors and factors that support double-tax-rule equivalence. Examples violating these conditions help identify economic factors under which a home country has strict preferences over double taxation rules. If the home tax rate can influence host factor prices, the home country weakly prefers deductions over credits as in the pure-home-equity financing case.

tax competition double taxation foreign capital 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Altshuler, R. and J. Mintz. (1995). “U.S. Interest-Allocation Rules: Effects and Policy.” International Tax and Public Finance 2, 7-35.Google Scholar
  2. Barnea, A., R. Haugen and L. Senbet. (1985). Agency Problems and Financial Contracting, Prentice-Hall: Englewood-Cliffs Publishers.Google Scholar
  3. Bhagwati, J., A. Panagariya and T. N. Srinivasan. (1998). Lectures on International Trade, 2nd edition. Cambridge: The MIT Press.Google Scholar
  4. Bond, E. and L. Samuelson. (1989). “Strategic Behaviour and the Rules for International Taxation of Capital.” Economic Journal 99, 1099-1111.Google Scholar
  5. Calvo, G. and S.Wellisz. (1983). “International Factor Mobility and National Advantage.” Journal of International Economics 14, 103-114.Google Scholar
  6. Caves, R. (1996). Multinational Enterprise and Economic Analysis, 2nd ed. Cambridge University Press.Google Scholar
  7. Collins, J. and D. Shackelford. (1992). “Foreign Tax Credit Limitations and Preferred Stock Issuances.” Journal of Accounting Research 30, 103-124.Google Scholar
  8. Feldstein, M. (1994a). “Taxes, Leverage, and the National Return on Outbound Foreign Direct Investment.” NBER Working Paper No. 4689.Google Scholar
  9. Feldstein, M. (1994b). “Tax Policy and International Capital Flows.” NBER Working Paper No. 4851.Google Scholar
  10. Feldstein, M. (1995). “The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock.” In Martin Feldstein, James Hines, Jr. and R. Glenn Hubbard (eds.), The Effects of Taxation on Multinational Corporations. University of Chicago Press.Google Scholar
  11. Feldstein, M. and D. Hartman. (1979). “The Optimal Taxation of Foreign Source Investment Income.” Quarterly Journal of Economics 93, 613-629.Google Scholar
  12. Feldstein, M. and C. Horioka. (1980). “Domestic Saving and International Capital Flows.” Economic Journal 90, 314-329.Google Scholar
  13. Froot, K. and J. Hines, Jr. (1995). “Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals.” In Martin Feldstein, James Hines Jr. and R. Glenn Hubbard (eds.), The Effects of Taxation on Multinational Corporations. University of Chicago Press.Google Scholar
  14. Gordon, R. (1992). “Can Capital Income Taxes Survive in Open Economies?” The Journal of Finance 67, 1159-1180.Google Scholar
  15. Hamada, K. (1966). “Strategic Aspects of Taxation on Foreign Investment Income.” Quarterly Journal of Economics 80, 361-375.Google Scholar
  16. Hartman, D. (1985). “Tax Policy and Foreign Direct Investment.” Journal of Public Economics 26, 107-121.Google Scholar
  17. Hines, J. Jr. (1988). “Taxation and U.S. Multinational Investment.” In Lawrence Summers (ed.), Tax Policy and the Economy. MIT Press.Google Scholar
  18. Hines, J. Jr. (1994). “Credit and Deferral as International Investment Incentives.” Journal of Public Economics 55, 323-347.Google Scholar
  19. Horst, T. (1977). “American Taxation of Multinational Firms.” American Economic Review 67, 376-389.Google Scholar
  20. Howenstine, N. and W. Zeile. (1994). “Characteristics of Foreign-Owned U.S. Manufacturing Establishments.” Survey of Current Business 74, 34-59.Google Scholar
  21. Janeba, E. (1995). “Corporate Income Tax Competition, Double Taxation Treaties, and Foreign Direct Investment.” Journal of Public Economics 56, 311-325.Google Scholar
  22. Jenkins, R. (1990). “Comparing Foreign Subsidiaries and Local Firms in LDCs: Theoretical Issues and Empirical Evidence.” Journal of Development Studies 26, 205-228.Google Scholar
  23. Jensen, M. and W. Meckling. (1976). “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics 3, 305-360.Google Scholar
  24. Jones, R. and I. Coelho. (1985). “International Factor Movements and the Ramaswami Argument.” Economica 52, 359-364.Google Scholar
  25. Jones, R., I. Coelho and S. Easton. (1986). “The Theory of International Factor Flows: The Basic Model.” Journal of International Economics 20, 313-327.Google Scholar
  26. Leechor, C. and J. Mintz. (1993). “On the Taxation of Multinational Corporate Investment when the Deferral Method is Used by the Capital Exporting Country.” Journal of Public Economics 51, 75-96.Google Scholar
  27. Newlon, T. S. (1987). “Tax Policy and the Multinational Firm's Financial Policy and Investment Decisions.” Unpublished Ph.D. dissertation, Princeton University.Google Scholar
  28. Osterberg, W. (1989). “Tobin's q, Investment, and the Endogenous Adjustment of Financial Structure.” Journal of Public Economics 40, 293-318.Google Scholar
  29. Ramaswami, V. (1968). “International Factor Movement and the National Advantage.” Economica 35, 309-310.Google Scholar
  30. Razin, A., E. Sadka and C.-w. Yuen. (1998). “A Pecking Order of Capital Inflows and International Tax Principles.” Journal of Public Economics 44, 45-68.Google Scholar
  31. Rybczynski, T. (1955). “Factor Endowments and Relative Commodity Prices.” Economica 22, 336-341.Google Scholar
  32. Stevens, G. and R. Lipsey. (1988). “Interactions between Domestic and Foreign Investment.” International Finance Discussion Papers No. 329, Board of Governors of the Federal Reserve System.Google Scholar
  33. U.S. Department of Commerce. (1992). 1989 Benchmark Survey of U.S. Investment Abroad. U. S. Government Printing Office: Washington D.C.Google Scholar
  34. Wilson, J. (1987). “Trade, Capital Mobility, and Tax Competition.” Journal of Political Economy 95, 835-856.Google Scholar
  35. Wilson, G. P. (1993). “The Role of Taxes in Location and Sourcing Decisions.” In Alberto Giovannini, R. Glenn Hubbard and Joel Slemrod (eds.), Studies in International Taxation. University of Chicago Press.Google Scholar
  36. Zebregs, H. (1998). “Can the Neoclassical Model Explain the Distribution of Foreign Direct Investment Across Developing Countries?” International Monetary Fund Working Paper No. WP/98/193.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Ronald B. Davies
    • 1
  • Thomas A. Gresik
    • 2
  1. 1.University of OregonUSA
  2. 2.Mendoza College of BusinessUniversity of Notre DameNotre Dame

Personalised recommendations