Playing Easy or Playing Hard to Get: When and How to Attract FDI

Arbeitspapier

We study the link between a country’s institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8415

Classification and Topics

• Classification: Wirtschaft ; Multinational Firms; International Business ; Tax Evasion and Avoidance ; Fiscal Policies and Behavior of Economic Agents: Firm ; Economic Impacts of Globalization: Policy
• Subject: FDI ; thin capitalization rules ; transfer pricing ; institutional quality

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gresik, Thomas A. ; Schindler, Dirk ; Schjelderup, Guttorm
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/223487
• Last update: 10.03.2025, 11:45 AM CET