"A 1 percent increase in aftertax returns led to an almost 3 percent increase in the real capital stock of overseas manufacturing affiliates in 1992."
In Has U.S. Investment Abroad Become More Sensitive to Tax Rates?, (NBER Working Paper No. 6383) , co-authors Rosanne Altshuler, Harry Grubert, and T. Scott Newlon address two critical questions concerning the investment decisions of U.S. multinational corporations. First, how sensitive are investment location decisions to differences in tax rates across countries? And second, have investment location decisions become more sensitive to tax rates abroad?
The authors find large effects of taxes on the location of investment abroad. Their estimates suggest that a 1 percent increase in aftertax returns led to an almost 3 percent increase in the real capital stock of overseas manufacturing affiliates in 1992 and a 1.5 percent increase in 1984. This indicates that the allocation of real capital abroad may have become more sensitive to differences in host country taxes in recent years. These results are consistent with increasing international mobility of capital and globalization of production.
This study uses data for 1984 and 1992 from U. S. Treasury corporate tax return files for U.S. manufacturing affiliates. To estimate the sensitivity of location decisions to host country tax rates, the authors use a measure of real capital held in each of the 58 countries in their sample and consider its relationship to tax and nontax characteristics of countries.
The availability of two years of tax return data gives this study two advantages over other recent studies of the effect of host country tax rates on U.S. direct investment abroad. First, with two years of data, the authors can control for any differences in nontax features of countries that may be correlated with tax rates. Second, the authors can examine whether investment choices abroad have become more sensitive to tax rates over their sample period. This period is particularly interesting, since it was a time of intense tax reform activity in many countries around the world. Although changes in effective tax rates have differed widely across countries in their sample, the authors find an average effective tax rate decrease of 10 percentage points from 1984 to 1992.