Corporate Tax Cuts and Foreign Direct Investment

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 methods—the difference‐in‐differences estimation and the synthetic controls method—to 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.

Fiscal decentralization and tax incentives in the developing world

“…However, tax competition also happens frequently among subnational governments, especially when they have the authority to set their own tax rates. Baccini, Li, and Mirkina (2014), for example, show that in the year after the Russian Tax Code reform in 2002, which allowed the regions for the first time to reduce corporate profit tax rates, various regions experimented with different tax cut policies. Ten regions cut their profit tax rates on net income from all direct investments from 24% to 20% while some other 34 regions cut corporate tax rates on select government-approved investment projects from 24% to somewhere between 20% and 23.5%.…”

Cherry Picking with Synthetic Controls

“…To illustrate this lack of consensus, we present in Table 1 a list with all papers that use the SC method published in the American Economic Review, American Economic Journal-Economic Policy, American Economic Journal-Applied Economics, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics, Journal of Development Economics, Journal of Labor Economics, and Journal of Policy Analysis and Management, including information on the specifications used in the implementation of the method. Abadie and Gardeazabal (2003), Abadie, Diamond, and Hainmueller (2015), Kleven, Landais, and Saez (2013), Baccini, Li, andMirkina (2014), andDeAngelo andHansen (2014) use the mean of all pre-treatment outcome values and additional covariates; Cunningham and Shah (2018) Outcome Lags included in matrix Xj . The last pre-treatment period (T0 ) is denoted by the number 0.…”

“…4 In this paper, we investigate these opportunities for specification searching by considering only one particular step of the method: the choice of pre-treatment outcome lags used in the estimation of the SC weights. 5 In the following section, 1 SC has been used to analyze terrorism (Abadie & Gardeazabal, 2003;Montalvo, 2011), political and economic reforms (Billmeier & Nannicini, 2011;Billmeier & Nannicini, 2013); crime and police (Cunningham & Shah, 2018;DeAngelo & Hansen, 2014;Donohue, Aneja, & Weber, 2018;Pinotti, 2013); natural resources and disasters (Barone & Mocetti, 2014;Cavallo et al, 2013;Smith, 2015); immigration (Bohn, Lofstrom, & Raphael, 2014;Dustmann, Schonberg, & Stuhler, 2017); education (Belot & Vandenberghe, 2014;Hinrichs, 2012); pregnancy and parental leave (Bartel et al, 2018;Lindo & Packham, 2017); taxation (Baccini, Li, & Mirkina, 2014;Kleven, Landais, & Saez, 2013); social connections (Acemoglu et al, 2016); local development (Gobillon & Magnac, 2016;Zou, 2018). 2 See Christensen and Miguel (2018) for an extensive literature review on research transparency and reproducibility.…”

The Determinants of Fiscal Effectiveness of the Tax System

“…Wszystko zależy w tej mierze od specyfiki regionu, spójności polityki krajowej i samorządowej oraz rodzaju i uznawalności (bądź nie) zastosowania ulg podatkowych. jeżeli bowiem dane ulgi będą odnosiły się tylko i wyłącznie do określonych projektów wybieranych wybiórczo, to stosowanie takich praktyk samo w sobie stwarza nierówne warunki konkurowania, nie dając żadnych gwarancji długoterminowego rozwoju danej działalności, gdyby ulgi przestały obowiązy-wać [Boccini, li, Mirkina, 2014, s. 977-1006. Może się okazać, że dużo bardziej opłacalne dla danego podmiotu będzie ogłoszenie upadłości dobrze prosperującej działalności gospodarczej i jej migracja do innego kraju tylko z tego względu, że nie opłacalne by było prowadzenie działalności gospodarczej obciążonej standardowym opodatkowaniem.…”