IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/1011.html
   My bibliography  Save this paper

How tax incentives affect decisions to invest in developing countries

Author

Listed:
  • Boadway, Robin
  • Shah, Anwar

Abstract

The authors contend that in evaluating and designing investment incentives in developing economies, analysts should consider their effect on: the marginal effective tax rate (METR). Even simple tax incentives can perversely affect the METR. Many schemes have relatively generous write-offs to begin with, so generous that a negative marginal effective tax rate is not uncommon. In these circumstances, tax rate reductions (including tax holidays) can discourage investment. Investment tax credits are more likely to be effective. Loss firms. Incentives that do not have generous loss-offsetting or refundability provisions will be of limited use to firms likely to suffer losses (including small growing firms and firms in risky environments). Cash flows. Incentives that improve firms' cash flows may be more effective than those that do not. Refundability may be important here. Simply adopting cash-flow costing principles with refundability may be more effective than reducing tax rates. Foreign-owned firms. If the value of a tax incentive is fully offset by reduced credits for foreign taxes, the incentive effect will probably be minimal. Capital allocation among assets. Some measures favor short- over long-lived capital, machinery over inventory, some industries over others. Incentives that encourage investment selectively may cause distortions in the way capital is allocated. Other factors to be considered in designing tax incentives: inflation, which is typically high in developing economies. Incentives should offset the effects of inflation; tax evasion, a common problem in developing countries; technology transfer; the fulfillment of social, environmental, and regional non-economic objectives; the effects on firms' organization (do the incentives encourage mergers, takeovers, or bankruptcy)

Suggested Citation

  • Boadway, Robin & Shah, Anwar, 1992. "How tax incentives affect decisions to invest in developing countries," Policy Research Working Paper Series 1011, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1011
    as

    Download full text from publisher

    File URL: https://documents.worldbank.org/curated/en/962381468739248625/pdf/multi-page.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thierry Madiès & Jean-Jacques Dethier, 2012. "Fiscal Competition In Developing Countries: A Survey Of The Theoretical And Empirical Literature," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-31.
    2. Mr. Philip R. Gerson, 1998. "The Impact of Fiscal Policy Variables on Output Growth," IMF Working Papers 1998/001, International Monetary Fund.
    3. Tatiana Malinina, 2010. "Recognition and Measurement of Tax Expenditures: International Experience and Russian Practice," Research Paper Series, Gaidar Institute for Economic Policy, issue 146P.
    4. Sergey Sinelnikov-Murylev & Elena Shkrebela, 2011. "Improvement of corporate profit tax in the Russian Federation in the medium term," Research Paper Series, Gaidar Institute for Economic Policy, issue 149P.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.