High US Corporate Tax Rates Are Driving Investments Abroad

From "Race to the Top of the Laffer Curve" by Aparna Mathur in the Journal of the American Enterprise Institute:

The international tax literature Roger Gordon and James Hines summarize in their 2002 article shows that mobile capital flows from high-tax to low-tax jurisdictions. In any set of competing countries, relative rates of taxation determine investment flows. In other words, America’s high corporate tax rates are driving investments abroad and causing firms to rethink expansion plans in the United States. The loss in revenues, or in effective taxes paid, should not shock us.***But for investment purposes, the important figure is the effective average tax rate (EATR), or the difference between the pre-tax return and the post-tax return on investment, expressed as a fraction of pre-tax economic profits. More simply, it is the tax liability that a firm may expect to incur as a fraction of pre-tax economic profits. The EATR differs from the statutory rate because it allows for other features of the tax code, such as depreciation allowances or interest rate deductions, which enable firms to ultimately pay less than the statutory rate.

A 1998 paper by Michael Devereux and Rachel Griffith shows that the EATR is the critical tax rate determining where firms locate investment. Countries with high EATRs lose, while capital flows to the low EATR jurisdictions.

EATR=Effective Avg Tax Rate:
EMTR=Effective Marginal Tax Rate 

Read the complete article here.