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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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    7. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, March.
    8. King, Ian & Welling, Linda, 1992. "Commitment, Efficiency and Footloose Firms," Economica, London School of Economics and Political Science, vol. 59(233), pages 63-73, February.
    9. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-826, September.
    10. Raff, H., 1991. "Tax Holidays, Tariffs and Foreign Direct Investment Under Asymetric Information," Papers 9107, Laval - Recherche en Energie.
    11. King, I. & McAfee, R.P. & Welling, L., 1990. "Industrial Blackmail," Papers 130, Calgary - Department of Economics.
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    Cited by:

    1. 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.
    2. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo.
    3. 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.
    4. Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo.
    5. 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.

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    Keywords

    tax holidays; foreign investment;

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