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Are Tax Credits Effective in Developing Countries? The Recent Uruguayan Experience

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  • Cecilia Llambi
  • Andres Rius
  • Fedora Carbajal
  • Paula Carrasco
  • Paola Cazulo

Abstract

Investment promotion through tax incentives has been a key component of the growth strategies pursued in Uruguay by the last three administrations. A new regime was estab- lished, regulated by Executive Decree 455, which implemented a major overhaul in the main channel for subsidizing investment. This regime immediately generated a battery of research- able questions about its effectiveness and efficiency. Using a large data set, first put together for this study from firm-level administrative records kept by the tax collection and pensions institutes between 2005 and 2011, we test the hypotheses of significant and positive effects of obtaining a tax credit through the new regime on investment and employment outcomes. A matched difference-in-differences strategy confirms that the promotion regime introduced in 2008 had a statistically significant effect on the firms’ rate of investment (around 11 percent), while the effects on employment growth rate were more ambiguous. These findings are but- tressed by several robustness tests. Further probing uncovers heterogeneity along the promotion timeline, with the greatest effect on the investment rate occurring in a project’s first year.

Suggested Citation

  • Cecilia Llambi & Andres Rius & Fedora Carbajal & Paula Carrasco & Paola Cazulo, 2018. "Are Tax Credits Effective in Developing Countries? The Recent Uruguayan Experience," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 25-58, May.
    • Handle: RePEc:col:000425:016331
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    Keywords

    Investment; impact evaluation; tax incentives; Uruguay;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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