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Tax policy options to promote private capital formation in Pakistan

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  • Feltenstein, Andrew
  • Shah, Anwar

Abstract

The authors developed a simple two-period general equilibrium model to analyze the macroeconomic impact of tax policies in Pakistan. They analyze two scenarios. In scenario 1, the investment tax credit rate is increased from 15 percent to 30 percent. The new fiscal regime increases investment but also significantly increases inflation. In scenario 2, the original investment tax credit rate is retained but the statutory corporate tax rate is reduced. Welfare improves more than under scenario 1. The authors conclude that in Pakistan, at least, changes in corporate tax rates are probably better instruments for promoting capital formation than are increased investment tax credits. In particular, cuts in corporate taxes improve welfare more than do increases in investment tax credits. Increasing the investment tax credit stimulates more capital formation than does decreasing corporate taxes, but the tax credits also have significant macroeconomic consequences.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 698.

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Date of creation: 30 Jun 1991
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Handle: RePEc:wbk:wbrwps:698

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Related research

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

References

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  1. Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226036335.
  2. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Working Papers 90-09, University of Washington, Department of Economics.
  3. Feltenstein, Andrew & Morris, Stephen, 1988. "Fiscal stabilization and exchange rate instability," Policy Research Working Paper Series 74, The World Bank.
  4. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
  5. Alan J. Auerbach & James R. Hines Jr., 1988. "Investment Tax Incentives and Frequent Tax Reforms," NBER Working Papers 2492, National Bureau of Economic Research, Inc.
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