Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7243382 | Journal of Economic Behavior & Organization | 2014 | 18 Pages |
Abstract
This paper investigates the tax responsiveness of multinational firms' investment decisions in foreign countries, distinguishing firms that are able to avoid taxes (avoiders) from those that are not (non-avoiders). From a theoretical point of view, the tax responsiveness of firms crucially depends on this distinction. Empirically, however, a firm's ability to avoid profit taxes is inherently unobservable to the researcher. To address this problem, we use a finite mixture modeling approach which allows us to distinguish avoiders from non-avoiders stochastically from a mixture of distributions of the two types of firms. Using panel data on the universe of foreign affiliates of German multinational firms over the years 1999-2010, we find that investments of tax avoiders do not respond to host-country profit taxes at all, while those of non-avoiders do. About 11% of the affiliates are estimated to be able to avoid taxes. These investments account for about 58% of the stock of foreign fixed assets held by German multinational firms abroad. A one-percentage-point increase in the statutory corporate profit tax rate of a host country is found to reduce the fixed assets of non-avoiders in that host country by 0.81%.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Peter H. Egger, Valeria Merlo, Georg Wamser,