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Causes, Benefits, and Risks of Business Tax Incentives

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  • Alexander Klemm

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/21.

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Length: 29
Date of creation: 01 Jan 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/21

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Keywords: Tax incentives; Foreign direct investment; tax system; tax rates; tax competition; taxation; effective tax rates; tax systems; corporate income tax; capital taxes; tax revenues; tax administration; international tax; tax liability; tax policy; tax reforms; tax reform; tax evasion; capital stock; tax credits; public finance; tax cut; tax revenue; tax bases; income taxes; tax journal; tax expenditure; foreign-source income; tax returns; fiscal studies; taxable profits; high tax rates; tax credit; tax sparing; international tax competition; national tax journal; tax base; tax cuts; corporate income taxation; tax payments; tax avoidance; efficient tax system; tax collection; corporate income taxes; lower tax rates; tax coordination; home country; labor taxes; tax changes; fiscal affairs; tax treaties; taxes on capital; amount of tax; foreign taxes; tax on dividends; personal taxes; fiscal incentives; fiscal affairs department; average tax rate; personal income taxes; home country taxation; tax harmonization; corporate tax rates; tax liabilities; marginal costs of taxation; tax distortions; tax differentiation; tax burden; wage taxes; taxation of income; single tax rate; investment tax credit; indirect tax; tax cooperation; theory of taxation; marginal tax rate; tax instruments; country taxation; international taxation; fiscal reform; filing tax returns; direct tax; costs of taxation; direct taxation; personal income tax; taxes on labor; petroleum taxation; fiscal incentives for investment; optimal tax; tax incidence; tax treatment; corporate taxes; corporate tax rate; business taxation; employment taxes;

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References

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  1. 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.
  2. Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, vol. 78(2), pages 211-16, May.
  3. Mintz, Jack M, 1990. "Corporate Tax Holidays and Investment," World Bank Economic Review, World Bank Group, vol. 4(1), pages 81-102, January.
  4. Alexander Klemm, 2008. "Effective Average Tax Rates for Permanent Investment," IMF Working Papers 08/56, International Monetary Fund.
  5. Mario Mansour & Michael Keen, 2009. "Revenue Mobilization in Sub-Saharan Africa," IMF Working Papers 09/157, International Monetary Fund.
  6. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  7. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
  8. 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.
  9. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  10. 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.
  11. Haufler, A. & Schjelderup, G., 1999. "Corporate Tax Systems and Cross Country Profit Shifting," Papers 1/99, Norwegian School of Economics and Business Administration-.
  12. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital mobility and tax competition," Munich Reprints in Economics 20329, University of Munich, Department of Economics.
  13. Alexander Klemm, 2004. "A minimum rate without a common base?," Intereconomics: Review of European Economic Policy, Springer, vol. 39(4), pages 186-189, July.
  14. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
  15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  16. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  17. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, vol. 10(2), pages 107-26, March.
  18. 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.
  19. Bond, Eric W, 1981. "Tax Holidays and Industry Behavior," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 88-95, February.
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Citations

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Cited by:
  1. Suzuki, Masaaki, 2014. "Corporate effective tax rates in Asian countries," Japan and the World Economy, Elsevier, vol. 29(C), pages 1-17.
  2. 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.
  3. Masaaki Suzuki, 2013. "Corporate Effective Tax Rates in Asian Countries," KIER Working Papers 875, Kyoto University, Institute of Economic Research.
  4. Alexander Klemm & Stefan Parys, 2012. "Empirical evidence on the effects of tax incentives," International Tax and Public Finance, Springer, vol. 19(3), pages 393-423, June.
  5. 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.
  6. 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.
  7. Ruben Atoyan, 2010. "Beyond the Crisis," IMF Working Papers 10/92, International Monetary Fund.
  8. 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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