Tax-based Capital Controls’ Efficacy at Affecting the Composition of Foreign Capital

Abstract: This paper investigates whether countries can use tax-based forms of capital controls to affect the share of foreign direct investment (FDI) relative to debt. Doing so might enable a country to influence capital-recipient countries’ foreign capital towards FDI and away from debt. The empirical model and dependent, explanatory, and control variables have been drawn from existing literature and have been applied to a panel data set consisting of 20 countries spanning 1999 to 2011. The main empirical findings show that a tax preference for FDI is more effective and persistent than a tax discrimination against debt investments.