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Corporate tax structure and production

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  • Bernstein, Jeffrey
  • Shah, Anwar

Abstract

The authors provide an empirical framework for assessing the effects of tax policy on an array of producer decisions about output supplies and input demands in Mexico, Pakistan, and Turkey. They specify and estimate a dynamic production structure model with imperfect competition for selected industries in these countries. The model results suggest that tax policy affected production and investment and further that selective tax incentives such as investment tax credits, investment allowances, and accelerated capital consumption (depreciation) allowances are more cost effective at promoting investment than more general tax incentives such as corporate tax rate reductions. The long run cost effectiveness of these incentives - except corporate tax rate reductions, which proved cost ineffective in all cases - varies by country. In Turkey, investment allowances and capital consumption allowances were cost effective. In Mexico, neither investment tax credits nor accelerated capital consumption allowances were cost effective. In contrast, in Pakistan, both investment tax credits and accelerated capital consumption allowances were cost effective. In the intermediate run, defined as tax policy impact after one year, only the investment allowances and accelerated capital consumption allowances available to Turkish industries proved cost effective. To make selective tax incentives more effective, investmenttax credits must be refundable and carrying forward investment depreciation allowances must be permitted. If stimulating investment expenditure is the sole objective of tax policy, reducing the corporate tax rate is not a cost effective instrument to achieve this objective.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1196.

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Date of creation: 30 Sep 1993
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Handle: RePEc:wbk:wbrwps:1196

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Keywords: Economic Theory&Research; Environmental Economics&Policies; International Terrorism&Counterterrorism; Public Sector Economics&Finance; Banks&Banking Reform;

References

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  1. Mortensen, Dale T, 1973. "Generalized Costs of Adjustment and Dynamic Factor Demand Theory," Econometrica, Econometric Society, vol. 41(4), pages 657-65, July.
  2. Epstein, Larry G. & Yatchew, Adonis J., 1985. "The empirical determination of technology and expectations : A simplified procedure," Journal of Econometrics, Elsevier, vol. 27(2), pages 235-258, February.
  3. Jeffrey I. Bernstein & Pierre Mohnen, 1991. "Price-Cost Margins, Exports and Productivity Growth: With an Application to Canadian Industries," Canadian Journal of Economics, Canadian Economics Association, vol. 24(3), pages 638-59, August.
  4. Epstein, Larry G, 1981. "Duality Theory and Functional Forms for Dynamic Factor Demands," Review of Economic Studies, Wiley Blackwell, vol. 48(1), pages 81-95, January.
  5. Hall, Robert E & Jorgenson, Dale W, 1969. "Tax Policy and Investment Behavior: Reply and Further Results," American Economic Review, American Economic Association, vol. 59(3), pages 388-401, June.
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Cited by:
  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. James Alm & Mir Ahmad Khan, 2008. "Assessing Enterprise Taxation and the Investment Climate in Pakistan," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0810, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Sebastian Sosa, 2006. "Tax Incentives and Investment in the Eastern Caribbean," IMF Working Papers 06/23, International Monetary Fund.

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