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Tax Incentives and Investment in the Eastern Caribbean

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  • Sebastian Sosa
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    Abstract

    Tax incentives have been used extensively in the countries of the Eastern Caribbean Currency Union (ECCU) to promote investment. The associated revenue losses are large, and benefits in terms of new investment have been limited, raising doubts about the cost effectiveness of the tax incentive schemes. This paper examines the effects of incentives using the marginal effective tax rate approach (METR), adapting this methodology to the case of a small open economy where the marginal investor is a nonresident. The results show that METRs are high in the region; that there is a large dispersion in the size of METRs across financing source; and that METRs on investment are larger than the overall distortion on capital, with a substantial subsidy to domestic saving. In the presence of tax holidays-the most common incentive scheme in the region-the distortion on capital basically vanishes.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/23.

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    Length: 29
    Date of creation: 01 Jan 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/23

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    Keywords: Tax incentives; Eastern Caribbean Currency Union; Economic models; Tax rates; tax system; rate of return; tax rate; real rate of return; fiscal incentives; taxable income; income tax rate; fiscal incentives for investment; tax on dividends; depreciation allowances; taxation; domestic saving; foreign direct investment; cost of capital; direct investment; rates of return; investment incentives; tax systems; investors; tax structure; corporate tax; retained earnings; corporate taxes; tax incentive; investment behavior; tax revenues; tax policy; business taxes; corporate tax system; foreign investors; expected returns; international investors; corporate tax structure; tax credit; export processing zones; tax burden; tax on capital gains; interest payments; future cash flows; business investment;

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    1. Bernstein, Jeffrey & Shah, Anwar, 1993. "Corporate tax structure and production," Policy Research Working Paper Series 1196, The World Bank.
    2. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
    3. Shah, Anwar & Slemrod, Joel, 1991. "Do Taxes Matter for Foreign Direct Investment?," World Bank Economic Review, World Bank Group, World Bank Group, vol. 5(3), pages 473-91, September.
    4. Nigel Andrew Chalk, 2001. "Tax Incentives in the Philippines," IMF Working Papers 01/181, International Monetary Fund.
    5. Zee, Howell H. & Stotsky, Janet G. & Ley, Eduardo, 2002. "Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries," World Development, Elsevier, Elsevier, vol. 30(9), pages 1497-1516, September.
    6. Antonio Estache & Vitor Gaspar, 1995. "Why Tax Incentives Don't Promote Investment in Brazil," ULB Institutional Repository 2013/44076, ULB -- Universite Libre de Bruxelles.
    7. Hansson, Ingemar & Stuart, Charles, 1986. "The Fisher Hypothesis and International Capital Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(6), pages 1330-37, December.
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    Cited by:
    1. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
    2. Martin Bes & Daniel Alvarez-Estrada, 2013. "Promoting Growth in the Caribbean : Tax Incentives in Theory and in Practice," World Bank Other Operational Studies 16619, The World Bank.
    3. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 6(3).
    4. Koffie Ben Nassar, 2008. "Corporate Income Tax Competition in the Caribbean," IMF Working Papers 08/77, International Monetary Fund.

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