Advanced Search
MyIDEAS: Login

Why Lower Tax Rates May be Ineffective to Encourage Investment: The Role of The Investment Climate

Contents:

Author Info

  • S. VAN PARYS

    ()

  • S. JAMES
Registered author(s):

    Abstract

    In this paper we first analyze theoretically how the investment climate can affect the impact of corporate taxation on investment in a simple tax competition model where the corporate tax revenues are used to improve the investment climate. We find that an improvement of the investment climate increases the sensitivity of capital to the tax rate if the investment climate is very effective at enhancing the productivity of capital or if the investment climate enhances the productivity of capital much more when the initial investment climate is unattractive than when the initial investment climate is already attractive. As a result, the model calls for the estimation of an investment equation where the tax variable is moderated by an investment climate variable. We estimate such an investment equation using a unique panel dataset of effective corporate tax rates of 80 countries, including countries with an unattractive and countries with an attractive investment climate, for the period 2005-2008. We find two important results. First, a better investment climate increases the sensitivity of FDI to the tax rate. Second, in the worst investment climate countries, FDI reacts not negatively to a rise in the tax rate. These results have important policy implications. For bad investment climate countries it is ineffective to lower the tax rate to compensate for the bad investment climate. Instead, these countries should focus on improving the basic investment climate.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_10_676.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 10/676.

    as in new window
    Length: 46 pages
    Date of creation: Sep 2010
    Date of revision:
    Handle: RePEc:rug:rugwps:10/676

    Contact details of provider:
    Postal: Hoveniersberg 4, B-9000 Gent
    Phone: ++ 32 (0) 9 264 34 61
    Fax: ++ 32 (0) 9 264 35 92
    Web page: http://www.feb.ugent.be/
    More information through EDIRC

    Related research

    Keywords: tax competition; investment climate; developing countries; Foreign Direct Investment; corporate tax;

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:rug:rugwps:10/676. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nathalie Verhaeghe).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.