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Jenson, Nathan M. 2012.

Fiscal Policy and the Firm: Do Low Corporate Tax Rates Attract
Multinational Corporations? Comparative Political Studies 45 (8): 1004-1026

1. Research Question: Do low corporate tax rates affect flows of foreign direct investment
(FDI) in advanced industrialized economies?

Does globalization constrain the state in ways that generate tremendous costs for
governments raising rates of taxation?

Do the heated rhetorical battles between politicians over tax policy represent real choices
over the raising revenue at the expense of driving away productive capital?

2. Theory /Argument: According to Jensen, there is no relationship between tax rates and FDI
inflows; therefore, no tax policies have any observable impact of FDI flows.

3. Hypothesis: It is thought that changes in corporate tax rates bring about changes in the level
of FDI inflows.

4. Dependent Variable(s): foreign direct investment (FDI), FDI inflows

5. Independent Variable(s): corporate tax rates and tax rate changes, level of political risk,
existence of high levels of natural resources

6. Empirical Evidence/Data: Data was used from: 19 Organisation for Economic Co-operation
and Development (OECD) economies from 1990 to 2000, GDP from the World Bank (2004)
World Development indicators, wage data from 16 of 16 OECD countries...

7. Method of Analysis: Jensen used a time-series cross-sectional general error correction model
to test the impact of tax policy affects FDI in OECD countries. In total there were eight models
used. The first four models on the relationship between taxes on FDI were represented in Table
1 and models 5-8 are presented in Table 2 which shows FDI and the timing of tax
implementation.

8. Conclusion: Jensen concludes that there is no relationship between corporate tax rate changes
and FDI flows. He states that globalization does not put pressure on the welfare state through
aggregate flows of FDI and that national-level tax policy reforms in the OECD have no impact
on FDI flows. In addition to these conclusions, Jensen goes on to explain why despite the lack of
evidence in taxation affecting FDI flows, there are many attempts at tax reform in OECD
countries. For this he gives three theories: (1) globalization is used as a rhetorical marketing tool
by groups that find tax reductions useful, (2)politicians use tax policy as a way to take credit for
new investment in the country, and (3) which is the incorrect belief of politicians that firms
respond to tax rates. Ultimately, Jensens final claim states that OECD tax reforms do not have
an aggregate demand on foreign direct investment.

9. Unknown Vocabulary:
race to the bottom- when companies and countries try to compete with each other by
cutting tax rates, business regulations and environmental policies,

tax competition-when different countries seek to attract investment and multinational


companies, by offering lower tax rates,

10. Reaction/critique

Overall, Nathan M. Jensen concludes that tax policy does not affect FDI flows, that

globalization is overrated because it is simply used as a marketing tool by various groups and

that politicians incorrectly overstate the importance of tax policies. In this report, Jensen had

challenged the assumptions of numerous political scientists that states that corporate tax reforms

are critical to maintaining inward investment in advanced industrialized counties in an era of

globalization and capital mobility. I believe that he tested a very reasonable group and that

observing the tax rate and FDI trends of 19 OECD countries was a very consistent way of

obtaining trends of countries with the same control variables. For any future research, it would

be ideal to test less developed countries to see if the correlation hold up throughout. Additionally,

since Jensen only looked at this relationship during a time of equilibrium, the results may be

different when this is not the case.

This research shows that tax decisions are predominately the result of domestic politics,

not functional pressures associated with capital mobility and globalization. The suggestion is that

governments can pursue alternative strategies to attract inward investment. Jensen writes that

Politicians could appropriately anticipate the need to lower corporate taxes when their country

is not a competitive FDI location and adjust taxes before there is an observed reduction in FDI

inflows. If countries perfectly alter their tax rates to compensate for their disadvantages, we

could observe a tax rate change and no changes in the pattern of FDI(1013-1014).
Additionally, after reading this report I have been lead to suspect that corporations

investment decisions are determined by many factors, such as human capital, and the importance

of corporate taxation is seemingly hidden by those factors. However, low corporate taxation may

also encourage corporations to keep more revenue within it than have it taxed as other forms of

income. In normal times this may lead to firms to investing more of their revenue and so lead to

higher long run rates of growth.

Although low taxes may have less impact on investment decisions than is assumed, they

continue to shape where firms declare profits. For example, if high tax rates produce an educated

workforce, high wages, a well-developed infrastructure, or other public goods, multinational

corporations may choose high tax countries rather than low tax countries as an investment

location. Therefore, this article also leads one to think about the taxation policies that are put in

place and whether they are ultimately beneficial to the state. Some argue that taxes should be

reduced in corporations and others propose that the method of taxation should be altered. One

suggestion for the United States could be that corporations should be taxed based on their

revenues to avoid any manipulation with allocating and defining costs, and to eliminate the tax

advantages of being based outside the US. So, if taxes are based on revenues, all corporations

that sell here would pay taxes here. Then there could be an increase in the total corporate tax that

is collected without increasing the tax paid by US companies.

Overall, this data rich report shows well how tax policy does not affect FDI flows in the

19 OECD countries that Jensen researched. It is a good starting point for further analysis for

various countries and other factors that may affect FDI flow under different circumstances.