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The Case against Deferral: A Deferential Reconsideration

  • Hines, James R. Jr.

The ability to defer home country taxation of foreign income is widely criticized as encouraging excessive foreign investment. This criticism is based on a model in which the function of deferral is to reallocate a fixed supply of capital between foreign and domestic uses. In realistic situations, however, deferral enhances the value to home countries of inframarginal foreign investment, taxation raises the value of marginal foreign investment, and the trade-off between foreign and domestic investment need not be one-for-one. Together, these considerations imply that deferring home taxation of foreign income can enhance economic efficiency.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 52 (1999)
Issue (Month): n. 3 (September)
Pages: 385-404

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Handle: RePEc:ntj:journl:v:52:y:1999:i:n._3:p:385-404
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  1. James R. Hines, Jr., 1998. ""Tax Sparing" and Direct Investment in Developing Countries," NBER Working Papers 6728, National Bureau of Economic Research, Inc.
  2. James R. Hines Jr., 1998. "Investment Ramifications of Distortionary Tax Subsidies," NBER Working Papers 6615, National Bureau of Economic Research, Inc.
  3. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
  4. Bond, Eric W, 1981. "Tax Holidays and Industry Behavior," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 88-95, February.
  5. Charles Mclure & George Zodrow, 1996. "A hybrid consumption-based direct tax proposed for Bolivia," International Tax and Public Finance, Springer, vol. 3(1), pages 97-112, January.
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