Tax Incentives for Foreign Direct Investment: The Drawbacks
32 Pages Posted: 22 May 2009
Date Written: April 18, 2005
Generally, all taxes operate as incentives or disincentives to economic activity by changing relative prices. Tax incentives reduce the tax burden of the recipient and are intended by government to induce some kinds of economic behavior such as manufacturing, exporting, the channeling of investment to a particular area or region, and attracting foreign direct investment (FDI). Based on international organizations' reports, scholarly views, and the available evidence, my argument is that tax incentives often represent a second-best solution. The most efficient way to attract FDI is to minimize government interference in the marketplace, including by avoiding targeting, and instead by substantially reducing tax rates on everyone.
Keywords: foreign direct investment, tax incentives
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