DP3247 Evaluating Tax Policy for Location Decisions

Author(s): Michael P. Devereux , Rachel Griffith

Publication Date: March 2002

Keyword(s): tax policy , investment , location choice , tax coordination

JEL(s): H25 , H32

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3247.asp

We consider the impact of taxation when investors face a discrete choice between two or more mutually exclusive projects; in particular we consider the location choice of multinationals. Such choices depend on an effective average tax rate. We propose a precise measure of this rate, which is shown to be equal to a weighted average of an effective marginal tax rate and an adjusted statutory tax rate, where the weights depend on the profitability of the investment. Estimates of the distribution of this measure are presented and compared for domestic and international investment in the USA, France, Germany, and the UK. We analyse the impact of harmonising corporate tax rates in Europe on incentives to locate in France, Germany and the UK.