Labor Taxation and Foreign Direct Investment*

In this paper, we analyze the implications of the effective taxation of labor for profits and, hence, the decisions made by multinational enterprises concerning the location of their headquarters. If a higher employee‐borne tax burden reduces manager effort, it should also negatively affect firm profits and the location of the headquarters. We compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages. Our findings suggest that higher employee‐borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy.