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Corporate Tax Cuts and Foreign Direct Investment

Baccini, Leonardo; Li, Quan and Mirkina, Irina V LU (2014) In Journal of Policy Analysis and Management 33(4). p.977-1006
Abstract
Accurate policy evaluation is central to optimal policymaking, but difficult to achieve. Most often, analysts have to work with observational data and cannot directly observe the counterfactual of a policy to assess its effect accurately. In this paper, we craft a quasi-experimental design and apply two relatively new methodsthe difference-in-differences estimation and the synthetic controls methodto the policy debate on whether corporate tax cuts increase foreign direct investment (FDI). The taxation-FDI relationship has attracted wide attention because of mixed findings. We exploit a quasi-experimental design for Russian regions, which were granted autonomy to reduce corporate profit tax in 2003, enabling them to simultaneously... (More)
Accurate policy evaluation is central to optimal policymaking, but difficult to achieve. Most often, analysts have to work with observational data and cannot directly observe the counterfactual of a policy to assess its effect accurately. In this paper, we craft a quasi-experimental design and apply two relatively new methodsthe difference-in-differences estimation and the synthetic controls methodto the policy debate on whether corporate tax cuts increase foreign direct investment (FDI). The taxation-FDI relationship has attracted wide attention because of mixed findings. We exploit a quasi-experimental design for Russian regions, which were granted autonomy to reduce corporate profit tax in 2003, enabling them to simultaneously experiment with different tax policies. We estimate both the average and local treatment effects of two types of tax cuts on FDI inflows. We find that, on average, relative to the absence of tax cuts, nondiscriminatory tax cuts on direct investment profit increase FDI, but discriminatory tax cuts on selected government-sanctioned investment projects do not. Yet for both types of tax cuts, local treatment effects vary dramatically from region to region. Our research has important implications for the design of tax policy and fiscal incentive, and the assessment of fiscal policy reforms. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Policy Analysis and Management
volume
33
issue
4
pages
977 - 1006
publisher
Wiley-Blackwell
external identifiers
  • wos:000342812200008
  • scopus:85027917051
ISSN
0276-8739
DOI
10.1002/pam.21786
language
English
LU publication?
yes
id
fe179524-8646-4727-a35f-c21cc5588da2 (old id 4800343)
date added to LUP
2014-11-27 16:28:46
date last changed
2017-11-19 03:02:30
@article{fe179524-8646-4727-a35f-c21cc5588da2,
  abstract     = {Accurate policy evaluation is central to optimal policymaking, but difficult to achieve. Most often, analysts have to work with observational data and cannot directly observe the counterfactual of a policy to assess its effect accurately. In this paper, we craft a quasi-experimental design and apply two relatively new methodsthe difference-in-differences estimation and the synthetic controls methodto the policy debate on whether corporate tax cuts increase foreign direct investment (FDI). The taxation-FDI relationship has attracted wide attention because of mixed findings. We exploit a quasi-experimental design for Russian regions, which were granted autonomy to reduce corporate profit tax in 2003, enabling them to simultaneously experiment with different tax policies. We estimate both the average and local treatment effects of two types of tax cuts on FDI inflows. We find that, on average, relative to the absence of tax cuts, nondiscriminatory tax cuts on direct investment profit increase FDI, but discriminatory tax cuts on selected government-sanctioned investment projects do not. Yet for both types of tax cuts, local treatment effects vary dramatically from region to region. Our research has important implications for the design of tax policy and fiscal incentive, and the assessment of fiscal policy reforms.},
  author       = {Baccini, Leonardo and Li, Quan and Mirkina, Irina V},
  issn         = {0276-8739},
  language     = {eng},
  number       = {4},
  pages        = {977--1006},
  publisher    = {Wiley-Blackwell},
  series       = {Journal of Policy Analysis and Management},
  title        = {Corporate Tax Cuts and Foreign Direct Investment},
  url          = {http://dx.doi.org/10.1002/pam.21786},
  volume       = {33},
  year         = {2014},
}