Do non-profit taxes affect the location of economic activity? Evidence from the EU

The Impact of Non-Profit Taxes on Foreign Direct Investment: Evidence from German Multinationals

Thiess Buettner and Georg Wamser

Ifo Institute and Ludwig Maximilian University

The vast majority of economics research on the impact of taxes on the behaviour of multinational firms has focused on the role of
corporate income taxes. This is for sound theoretical reasons; the basic model used in most work implies that other taxes – such as
VAT or payroll taxes – are not ultimately borne by the company, and do not affect investment or financial policy. However, a recent paper
(by Professor Jim Hines and co-authors) presented empirical evidence of an effect of “indirect” taxes on investment decisions. (In this
paper, “indirect taxes” included all non-profit taxes).

This paper would reinvestigate this question. It would go beyond the paper by Hines et al in two ways. First, it would analyse rigorously
the economic conditions under which non-income taxes might affect investment decisions. Second, it would use data on different
forms of European taxes to investigate which taxes (if any) play a role.

This paper would use the same Bundesbank data as the paper by Weichenreider. Specifically, it would examine the location of
subsidiaries of German companies to examine the role played both by profits taxes and non-profits taxes.

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