The Impact of Tax Reform on Foreign Direct Investment

In an open economy the designers of the tax corporate system have to face the possibility that a too high tax may push capital abroad, through direct investments. This paper analyzes the Swedish corporate tax system with respect to the effective marginal corporate tax rate on a standard investment project. The estimation results point toward a small but, positive and significant, response of investment in new capital abroad to the net, after tax, return. The results also indicate that the 1991 tax reform had a very limited effect on foreign direct investment flows.