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Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data

Author

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  • Johannes Becker
  • Clemens Fuest
  • Thomas Hemmelgarn

Abstract

Does the reduction of the effective tax burden on corporations trigger foreign direct investment? We take the German tax reform of 2000 as a natural experiment in order to isolate the impact of corporate taxation on the investment of foreign-held affiliates in Germany. We do so by exploiting the very rich MiDi data base from the Deutsche Bundesbank. Although we deliberately choose an approach which is likely to underestimate the tax effects on investment we find significant evidence that the tax reduction had the intended effect of - ceteris paribus - fostering inward direct investment. We find an elasticity of inward foreign direct investment with respect to the effective marginal tax rate of -0.7. We repeat the analysis for different subgroups and find high degrees of heterogeneity. Our results do not allow to decide whether the model of discrete investment choices or the model of marginal adjustment of the capital stock performs better in explaining the investment data.

Suggested Citation

  • Johannes Becker & Clemens Fuest & Thomas Hemmelgarn, 2006. "Corporate Tax Reform and Foreign Direct Investment in Germany – Evidence from Firm-Level Data," CESifo Working Paper Series 1722, CESifo.
    • Handle: RePEc:ces:ceswps:_1722
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    References listed on IDEAS

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    Cited by:

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    2. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz & José F. Sanz‐Sanz, 2018. "Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(2), pages 372-399, April.
    3. Alfons J. Weichenrieder & Helen Windischbauer & Alfons Weichenrieder, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo.
    4. Christian Baretti & Doina Radulescu & Michael Stimmelmayr & Doina Maria Radulescu, 2008. "The Corporate Tax Reform of 2008: Germany’s Answer to Globalization – or Just Patchwork?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(03), pages 50-59, October.
    5. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    6. repec:ces:ifodic:v:6:y:2008:i:3:p:14567224 is not listed on IDEAS
    7. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz, 2012. "Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries," Discussion Papers 12/06, University of Nottingham, School of Economics.
    8. Christian Baretti & Doina Radulescu & Michael Stimmelmayr & Doina Maria Radulescu, 2008. "Die Unternehmensteuerreform 2008: Deutschlands Antwort auf die Globalisierung - oder doch ein Stückwerk?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 61(02), pages 30-38, January.
    9. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers 12-040, ZEW - Leibniz Centre for European Economic Research.
    10. Doina Maria Rădulescu & Michael Stimmelmayr, 2008. "Die Unternehmensteuerreform 2008: Eine Reformalternative für Deutschland?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(1), pages 19-36, February.
    11. Christina Elschner & Werner Vanborren, 2009. "Corporate Effective Tax Rates in an Enlarged European Union," Taxation Papers 14, Directorate General Taxation and Customs Union, European Commission, revised Apr 2009.
    12. Mian Sajid Nazir & Qaisar Hafeez & Salah U‐Din, 2022. "Did reduction in corporate tax rate attract FDI in Pakistan?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2256-2267, April.
    13. Mursal Harahap & Bonar M. Sinaga & Adler H. Manurung & Tubagus Nur Ahmad Maulana, 2018. "Impact of Policies and Macroeconomic Variables on Tax Revenue and Effective Tax Rate of Infrastructure, Utility, and Transportation Sector Companies Listed in Indonesia Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 8(3), pages 95-104.
    14. Michele Bernini & Tania Treibich, 2013. "Killing a Second Bird with One Stone? Promoting Firm Growth and Export through Tax Policy," GREDEG Working Papers 2013-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    15. Christian Baretti & Doina Radulescu & Michael Stimmelmayr, 2008. "The Corporate Tax Reform of 2008: Germany’s Answer to Globalization – or Just Patchwork?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(3), pages 50-59, October.
    16. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz & José F. Sanz‐Sanz, 2018. "Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(2), pages 372-399, April.

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    corporate taxation; foreign direct investment;

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