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Corporate Tax Holidays and Investment

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  • Mintz, Jack M

Abstract

Governments of developing countries commonly adopt tax holidays to encourage investment. This article evaluates the incentives provided by company income tax holidays and explains the importance of the timing of depreciation allowances in determining the effective tax rates and the cost of capital to firms considering additional investment during the holiday. If an asset is long-lived and depreciation allowances for tax purposes are accelerated, the tax holiday, by preventing depreciation deductions during periods of peak profits, may actually penalize a company for investing during the holiday. The closer the investment to the end of the holiday period, the more severe the penality. If, instead, depreciations allowances may be deferred until after the holiday, this program of incentives is quite generous to the firm. How these sharply contrasting results may emerge is illustrated through estimation of effective tax rates and user costs of capital under tax holiday systems in Bangladesh, Cote d'Ivoire, Malaysia, Morocco, and Thailand. Copyright 1990 by Oxford University Press.

Suggested Citation

  • Mintz, Jack M, 1990. "Corporate Tax Holidays and Investment," World Bank Economic Review, World Bank Group, vol. 4(1), pages 81-102, January.
  • Handle: RePEc:oup:wbecrv:v:4:y:1990:i:1:p:81-102
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    Cited by:

    1. Michael P. Devereux, 2003. "Measuring Taxes on Income from Capital," CESifo Working Paper Series 962, CESifo Group Munich.
    2. Danielova, Anna & Sarkar, Sudipto, 2011. "The effect of leverage on the tax-cut versus investment-subsidy argument," Review of Financial Economics, Elsevier, vol. 20(4), pages 123-129.
    3. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
    4. repec:taf:rjapxx:v:15:y:2010:i:2:p:166-191 is not listed on IDEAS
    5. Alexander Klemm, 2010. "Causes, benefits, and risks of business tax incentives," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(3), pages 315-336, June.
    6. S. Abbas & Alexander Klemm, 2013. "A partial race to the bottom: corporate tax developments in emerging and developing economies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 596-617, August.
    7. Zee, Howell H. & Stotsky, Janet G. & Ley, Eduardo, 2002. "Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries," World Development, Elsevier, vol. 30(9), pages 1497-1516, September.
    8. repec:exl:2manag:v:17:y:2016:i:2:p:261-275 is not listed on IDEAS
    9. Raff, Horst & Srinivasan, Krishna, 1998. "Tax incentives for import-substituting foreign investment:: Does signaling play a role?," Journal of Public Economics, Elsevier, vol. 67(2), pages 167-193, February.
    10. Roger Gordon, 1992. "Fiscal Policy during the Transition in Eastern Europe," CESifo Working Paper Series 23, CESifo Group Munich.
    11. Arkin Vadim & Arkina Svetlana & Slastnikov Alexander, 2003. "Investment Stimulation by a Depreciation Mechanism," EERC Working Paper Series 02-05e, EERC Research Network, Russia and CIS.
    12. Andréa M. Maechler, 2000. "The Politics of Trade Liberalization in the Presence of FDI Incentives," Working Papers 00.09, Swiss National Bank, Study Center Gerzensee.
    13. Suzuki, Masaaki, 2014. "Corporate effective tax rates in Asian countries," Japan and the World Economy, Elsevier, vol. 29(C), pages 1-17.
    14. Gauthier, Bernard & Gersovitz, Mark, 1997. "Revenue erosion through exemption and evasion in Cameroon, 1993," Journal of Public Economics, Elsevier, vol. 64(3), pages 407-424, June.
    15. Qazi Masood Ahmed & S. Moquet Ahsan, 1997. "Tax Concessions and Investment Behaviour," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 36(4), pages 537-562.
    16. Harchaoui, Tarek M. & Lasserre, Pierre, 1995. "Testing the impact of taxation on capacity choice: A 'putty clay' approach," Journal of Public Economics, Elsevier, vol. 56(3), pages 377-411, March.
    17. Masaaki Suzuki, 2013. "Corporate Effective Tax Rates in Asian Countries," KIER Working Papers 875, Kyoto University, Institute of Economic Research.
    18. Dennis Botman & Alexander Klemm & Reza Baqir, 2010. "Investment incentives and effective tax rates in the Philippines: a comparison with neighboring countries," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 15(2), pages 166-191.

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