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Tax Holidays and the International Capital Market

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  • Jean-François Wen

Abstract

The paper shows how a tax holiday may signal to a skepticalcapital market that the future level of taxation will be moderate.After the signal has informed investors that the host countrygovernment is a low-spender, the tax profile flattens out, correspondingto a tax reform stage. Contrary to the recent literature on taxholidays, this model assumes that: the capital market is perfectlycompetitive; sunk costs are captured by a convex cost function,instead of fixed costs; taxation is distortionary, not lump-sum;and the government maximizes a welfare function rather than taxrevenue. Copyright Kluwer Academic Publishers 1997

Suggested Citation

  • Jean-François Wen, 1997. "Tax Holidays and the International Capital Market," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(2), pages 129-148, May.
  • Handle: RePEc:kap:itaxpf:v:4:y:1997:i:2:p:129-148
    DOI: 10.1023/A:1008686203598
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    References listed on IDEAS

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    1. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(3), pages 211-225, October.
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    6. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
    7. Jean-Francois Wen, 1992. "Tax Holidays in a Business Climate," Working Paper 864, Economics Department, Queen's University.
    8. Raff, H., 1991. "Tax Holidays, Tariffs and Foreign Direct Investment Under Asymetric Information," Papers 9107, Laval - Recherche en Energie.
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    11. Koichi Hamada, 1966. "Strategic Aspects of Taxation on Foreign Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 361-375.
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    Cited by:

    1. Jean-Francois Wen & Fatih Yilmaz, "undated". "Contract Stability and Private Infrastructure Investment," Working Papers 2010-26, Department of Economics, University of Calgary, revised 14 Oct 2010.
    2. Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo.
    3. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    4. Boadway, Robin, 1999. "Le rôle de la théorie de l’optimum du second rang en économie publique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 75(1), pages 29-65, mars-juin.
    5. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo.

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    Keywords

    tax holidays; foreign investment;

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