The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence

A substantial empirical literature has grown up in the last two decades, investigating the determinants of flows of capital and the income from capital, and specifically the impact of taxation on such flows. This paper surveys this empirical evidence. Research has progressed rapidly over the last few years, and there are promising signs that it is beginning to overcome two weaknesses that were especially apparent in the earlier literature. First, until recently, there has been a lack of detailed microeconomic data available; most researchers have been forced to use aggregate data, which cannot account for differences between companies, industries, or in some cases, countries. The growing availability of more detailed data is summarised in the Data Appendix. Second – a weakness which arises partly out of the first – is that there has generally been a lack of structural modelling which enables the researcher to more carefully frame and test hypotheses. The literature has instead relied mostly on estimating reduced form models, using the most easily acquired data. The paper begins by asking what questions should be of most interest to policy makers. Given that multinationals may have a significant impact on economic welfare, this survey covers papers which examine the impact of taxation on a number of decisions taken by multinational companies. In particular, it surveys empirical research on the influence of taxes on: discrete location choices; capital expenditure decisions of affiliates; the overall allocation of capital across countries; differences in the rates of profit across countries; financial and organisational form decisions, especially the use of debt and the form and size of income repatriated to the parent; and intrafirm transfer prices and trade.