This paper provides a new explanation for "tax holidays," as well as their subsequent removal in a tax reform stage. In a two-period model, I assume that perfectly competitive foreign investors are uncertain about the host country government's propensity for public spending, and that infinitely divisible capital is subject to strictly convex adjustment costs. The host country government's current period tradeoff between public spending and the associated deadweight loss from distortionary taxation may signal the host's type and spare the investors from an unanticipated future tax hike. A separating equilibrium requires a deep tax concession early on, which corresponds to a tax holiday. When there are overlapping generations of foreign investors the tax profile flattens out over time as the information from tax holidays is exhausted; this is the tax reform phase.
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number
864.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)