Labor Taxes and Decision about FDI in the EU

Abstract

Abstract:This paper analyzes the relationship between tax variables and foreign direct investments. There are many studies with analysis of influence of corporate income tax, but only few with focus on individual taxation and social security contributions. The analysis is done for the decision if do FDI or do not do and about decision about amount of FDI. On the decision about realization of FDI has impact GDP per capita of home and partner country and distance between countries. GDP per capita of home country increase probability of location of FDI, GDP per capita and distance decrease the probability of the location of FDI in the partner country. Based on the results, on the amount of FDI have positive impact GDP variables and other variables -e.g. differences in corporate tax rate. Negative impact has distance between countries. The impact of social security payment is not obvious, because it differs based on the fact of average wage of employee (for higher than average earnings the relationship is negative, for average earnings the relationship is positive). Key words: FDI; Taxation; Individual taxation. JEL classification: F21, H24. Introduction and Literature ReviewForeign direct investment (FDI) is one of the best measurements how the country is successful with attracting foreign investors and how the competitiveness could be measured. There are many possible factors which could influence the decision about location and amount of the FDI. Demirhan and Masca (2008) and Becker et al., (2005) described some of these factors -market size measured by GDP, openness, labour cost and productivity, political risk, infrastructure, growth and tax. The aim of this paper will be to analyze influence of tax factors on the FDI. The tax factors will cover especially labour taxation (not only personal income tax, but also the social security contributions paid by employer and employee). The analysis of influence of tax variables could be done in two steps based on the 2 step estimation model described in Hansson and Olofsdotter (2014). The first step is to analyze if the FDI should be located in given country and the second step analyze the amount of FDI.

Measurement of Labour Taxation

“…Different results of ITR could also affect results of other related papers and studies which as their source data use values of implicit tax rates (e.g. Kotlán et al (2011), Tecl (2017), Pomerleau (2017)). There are many ways of how to measure and afterwards compare the labour taxation between countries.…”