Company taxation for the European Community: How sub-national tax variation affects business investment in the United States and Canada

Motivated by the European Community's desire to create a Single European Market, this thesis analyzes how sub-national tax variation affects business investment in the United States and Canada. The U.S. states and Canadian provinces use the formula apportionment tax system to tax multi-jurisdictional investment. This system is well-suited for an economy with few barriers to cross-border investment flows. Since a barrier-free economy is a chief goal for the Single European Market, the apportionment system may be a suitable tax system for the new European Union.;This thesis is divided into two parts--the United States and Canada. Each part provides background information about the country's experience with formula apportionment and presents empirical evidence on how corporate income taxation within an apportionment system affects investment decisions.;From a cross-section of state and industry data, chapter three shows that variations in the relative cost of labor help explain cross-state variations in manufacturing capital-labor ratios. Controlling for industrial mix, states with a higher relative cost of labor have a higher capital-labor ratio.;Chapter four examines how changes in state apportionment practices in the 1980's affected new capital spending. States that reduced the burden on the capital factor have greater capital spending, controlling for changes in tax rates.;Part two analyzes the Canadian apportionment system. The provinces use an identical formula and a nearly identical tax base. However, provincial tax rates and investment incentives vary and create substantial cross-provincial tax variation over time.;Using a panel of provincial data, chapter six shows that investment rises when a province reduces its tax rate. Likewise, investment rises in a province when a competing province raises its tax rate, holding its own rate constant. Similar results hold for changes in the cost of capital.