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Causes, benefits, and risks of business tax incentives

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  • Alexander Klemm

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Abstract

This paper provides an updated overview of tax incentives for business investment. It begins by noting that tax competition is likely to be a major force driving countries'' tax reforms, and discusses tax incentives as a possible response to this. This is complemented by other arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country''s circumstances.

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File URL: http://hdl.handle.net/10.1007/s10797-010-9135-y
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 17 (2010)
Issue (Month): 3 (June)
Pages: 315-336

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Handle: RePEc:kap:itaxpf:v:17:y:2010:i:3:p:315-336

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Tax incentives; Tax competition; Effective tax rates; H25; H87;

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References

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  1. Ruud de Mooij & S. Ederveen, 2001. "Taxation and foreign direct investment; a synthesis of empirical research," CPB Discussion Paper 3, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Auerbach, A.J. & Hines, Jr.J.R., 1988. "Investment Tax Incentives And Frequent Tax Reforms," Papers 135, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Devereux, Michael P & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers.
  4. Mintz, Jack M, 1990. "Corporate Tax Holidays and Investment," World Bank Economic Review, World Bank Group, vol. 4(1), pages 81-102, January.
  5. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  6. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  7. Nicholas Bloom & Rachel Griffith & John Van Reenen, 2007. "Do R&D Tax Credits Work? Evidence from a Panel of Countries 1979-1997," Discussion Papers 07-020, Stanford Institute for Economic Policy Research.
  8. Bond, Eric W, 1981. "Tax Holidays and Industry Behavior," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 88-95, February.
  9. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate tax systems and cross country profit shifting," Munich Reprints in Economics 20419, University of Munich, Department of Economics.
  10. Alexander Klemm & Dennis P. J. Botman & Reza Baqir, 2008. "Investment Incentives and Effective Tax Rates in the Philippines," IMF Working Papers 08/207, International Monetary Fund.
  11. Alexander Klemm, 2008. "Effective Average Tax Rates for Permanent Investment," IMF Working Papers 08/56, International Monetary Fund.
  12. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  13. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  14. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
  15. Alexander Klemm, 2004. "A minimum rate without a common base?," Intereconomics: Review of European Economic Policy, Springer, vol. 39(4), pages 186-189, July.
  16. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, vol. 1(1), pages 1-62, December.
  17. Mario Mansour & Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa," IMF Working Papers 09/157, International Monetary Fund.
  18. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
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Citations

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Cited by:
  1. S. Abbas & Alexander Klemm, 2013. "A partial race to the bottom: corporate tax developments in emerging and developing economies," International Tax and Public Finance, Springer, vol. 20(4), pages 596-617, August.
  2. Alexander Klemm & Stefan van Parys, 2009. "Empirical Evidenceon the Effects of Tax Incentives," IMF Working Papers 09/136, International Monetary Fund.
  3. Danielova, Anna & Sarkar, Sudipto, 2011. "The effect of leverage on the tax-cut versus investment-subsidy argument," Review of Financial Economics, Elsevier, vol. 20(4), pages 123-129.
  4. Masaaki Suzuki, 2013. "Corporate Effective Tax Rates in Asian Countries," KIER Working Papers 875, Kyoto University, Institute of Economic Research.
  5. Ruben Atoyan, 2010. "Beyond the Crisis," IMF Working Papers 10/92, International Monetary Fund.
  6. repec:idb:brikps:12358 is not listed on IDEAS
  7. Ruben Atoyan, 2010. "Beyond the crisis: revisiting emerging Europe’s growth model," Financial Theory and Practice, Institute of Public Finance, vol. 34(4), pages 329-356.
  8. Suzuki, Masaaki, 2014. "Corporate effective tax rates in Asian countries," Japan and the World Economy, Elsevier, vol. 29(C), pages 1-17.
  9. Bird, Richard M. & Zolt, Eric M., 2011. "Dual Income Taxation: A Promising Path to Tax Reform for Developing Countries," World Development, Elsevier, vol. 39(10), pages 1691-1703.

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