IMF Working Papers

Empirical Evidenceon the Effects of Tax Incentives

By Alexander D Klemm, Stefan van Parys

July 1, 2009

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Alexander D Klemm, and Stefan van Parys. Empirical Evidenceon the Effects of Tax Incentives, (USA: International Monetary Fund, 2009) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper considers two empirical questions about tax incentives: (1) are incentives used as tools of tax competition and (2) how effective are incentives in attracting investment? To answer these, we prepared a new dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004. Using spatial econometrics techniques for panel data to answer the first question, we find evidence for strategic interaction in tax holidays, in addition to the well-known competition over the corporate income tax rate. We find no evidence, however, for competition over investment allowances and tax credits. Using dynamic panel data econometrics to answer the second question, we find evidence that lower corporate income tax rates and longer tax holidays are effective in attracting FDI, but not in boosting gross private fixed capital formation or growth.

Subject: Balance of payments, Corporate income tax, Econometric analysis, Estimation techniques, Foreign direct investment, Tax holidays, Tax incentives, Taxes

Keywords: Asia and Pacific, Caribbean, CIT rate, Corporate income tax, Difference GMM estimator, Economic growth, Estimation techniques, Foreign direct investment, Global, GMM estimator, Investment, Investment allowance, Sub-Saharan Africa, System GMM estimation result, System GMM result, Tax competition, Tax holidays, Tax incentives, Tax variable, WP

Publication Details

  • Pages:

    25

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2009/136

  • Stock No:

    WPIEA2009136

  • ISBN:

    9781451872835

  • ISSN:

    1018-5941

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