This paper provides an analysis of the effects of domestic taxes and rates of return on foreign direct investment in the United States. The results show that, whereas foreign direct investment through retained earnings may be elastic with respect to tax rates and rates of return, foreign direct investment through new funds is inelastic with respect to tax rates and rates of return. Overall, the study indicates that the 1981-82 tax incentives increased total annual foreign direct investment in the United States by $1.7 to $4.8 billion (or 8 percent to 22 percent). On the other hand, the recent 1986 tax reform may decrease total annual foreign direct investment in the United States by $1.8 to $5.4 billion (or 8 percent to 25 percent). The welfare effect of these tax impacts is moderate, because tax revenue derived from total foreign direct investment appears to be inelastic with respect to the tax rate applicable to foreigners.