Taxes and the location of production: Evidence from a panel of US multinationals

This paper considers the factors that influence the locational decisions of multinational firms. A model in which firms produce differentiated products in imperfectly competitive markets is developed, in the spirit of . Firms choose between a number of foreign locations; the outside options of exporting to or not serving the foreign market are explicitly modelled. Particular attention is paid to the impact of profit taxes; the separate roles of effective average and marginal tax rates are identified. The model is applied to a panel of US firms locating in the European market. Agglomeration effects are found to be important. The effective average tax rate plays a role in the choice between locations, but not in the choice of whether to locate production in Europe compared with one of the outside options.