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U.S. Tax Policy and Direct Investment Abroad

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U.S. Tax Policy and Direct Investment Abroad This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Taxation in the Global Economy Volume Author/Editor: Assaf Razin and Joel Slemrod, editors Volume Publisher: University of Chicago Press, 1990 Volume ISBN: 0-226-70591-9 Volume URL: http://www.nber.org/books/razi90-1 Conference Date: February 23-25, 1989 Publication Date: January 1990 Chapter Title: U.S. Tax Policy and Direct Investment Abroad Chapter Author: Joosung Jun Chapter URL: http://www.nber.org/chapters/c7205 Chapter pages in book: (p. 55 - 78) 2 U.S. Tax Policy and Direct Investment Abroad Joosung Jun The effect of tax policy on the process of capital accumulation has long been an important subject of policy debates and academic research. The tax policy debate in the 1980s has been largely motivated by a concern over the rate of capital accumulation in the United States. Tax rules can affect the nation’s capital formation by influencing the return to saving and to investing in plant and equipment. However, the presence of international capital mobility requires policymakers to design tax incentives from a different perspective from that which would be taken in the case of immobile capital. Savings incentives and investment incentives can no longer be treated as alternative devices to enhance domestic capital formation. Part of domestic savings may flow into investment projects abroad, while domestic investment incentives can bring in more foreign capital. If long-term capital in particular is mobile across national boundaries, a country with higher domestic tax rates will drive domestic businesses abroad, while a country with generous investment allowances will attract more investments in plant and equipment. Several theoretical papers have suggested that international capital mobility would have important implications for the welfare effects of tax policy (e.g., Gordon 1986; S

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