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Tax Incentives and Investment in the Eastern Caribbean

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  • Sebastian Sosa

Abstract

Tax incentives have been used extensively in the countries of the Eastern Caribbean Currency Union (ECCU) to promote investment. The associated revenue losses are large, and benefits in terms of new investment have been limited, raising doubts about the cost effectiveness of the tax incentive schemes. This paper examines the effects of incentives using the marginal effective tax rate approach (METR), adapting this methodology to the case of a small open economy where the marginal investor is a nonresident. The results show that METRs are high in the region; that there is a large dispersion in the size of METRs across financing source; and that METRs on investment are larger than the overall distortion on capital, with a substantial subsidy to domestic saving. In the presence of tax holidays-the most common incentive scheme in the region-the distortion on capital basically vanishes.

Suggested Citation

  • Sebastian Sosa, 2006. "Tax Incentives and Investment in the Eastern Caribbean," IMF Working Papers 06/23, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/23
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    References listed on IDEAS

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    1. Antonio Estache & Vitor Gaspar, 1995. "Why Tax Incentives Don't Promote Investment in Brazil," ULB Institutional Repository 2013/44076, ULB -- Universite Libre de Bruxelles.
    2. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    3. Nigel A Chalk, 2001. "Tax Incentives in The Philippines; A Regional Perspective," IMF Working Papers 01/181, International Monetary Fund.
    4. 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.
    5. Shah, Anwar & Slemrod, Joel, 1991. "Do Taxes Matter for Foreign Direct Investment?," World Bank Economic Review, World Bank Group, vol. 5(3), pages 473-491, September.
    6. Hansson, Ingemar & Stuart, Charles, 1986. "The Fisher Hypothesis and International Capital Markets," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1330-1337, December.
    7. Bernstein, Jeffrey & Shah, Anwar, 1993. "Corporate tax structure and production," Policy Research Working Paper Series 1196, The World Bank.
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    Cited by:

    1. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
    2. Koffie Ben Nassar, 2008. "Corporate Income Tax Competition in the Caribbean," IMF Working Papers 08/77, International Monetary Fund.
    3. Martin Bes & Daniel Alvarez-Estrada, 2013. "Promoting Growth in the Caribbean : Tax Incentives in Theory and in Practice
      [Promoción del crecimiento en el Caribe : incentivos fiscales en teoría y en la práctica]
      ," World Bank Other Operational Studies 16619, The World Bank.
    4. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).

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