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Empirical Evidenceon the Effects of Tax Incentives

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  • Alexander Klemm
  • Stefan van Parys

Abstract

This paper considers two empirical questions about tax incentives: (1) are incentives used as tools of tax competition and (2) how effective are incentives in attracting investment? To answer these, we prepared a new dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004. Using spatial econometrics techniques for panel data to answer the first question, we find evidence for strategic interaction in tax holidays, in addition to the well-known competition over the corporate income tax rate. We find no evidence, however, for competition over investment allowances and tax credits. Using dynamic panel data econometrics to answer the second question, we find evidence that lower corporate income tax rates and longer tax holidays are effective in attracting FDI, but not in boosting gross private fixed capital formation or growth.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/136.

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Length: 25
Date of creation: 01 Jul 2009
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Handle: RePEc:imf:imfwpa:09/136

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Keywords: Tax incentives; Corporate sector; Corporate taxes; Developing countries; Economic growth; Foreign direct investment; Latin America; Tax rates; fdi; investment allowances; direct investment; tax competition; private investment; tax policy; tax incentive; tax rate; corporate tax; foreign investment; fixed capital; tax system; investors; foreign ownership; business investment; investment decisions; depreciation allowances; domestic investment; portfolio investment; bilateral investment; corporate tax incentives; investment theory; cost of capital; foreign investment advisory service; market size; income tax rate; investment growth; accelerated depreciation; investment tax credits; corporate tax rates; host countries; macroeconomic stability; investment flows;

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