Empirical Evidence on the Effects of Tax Incentives

26 Pages Posted: 28 Jul 2009

See all articles by Alexander Klemm

Alexander Klemm

International Monetary Fund (IMF)

Stefan Van Parys

International Monetary Fund (IMF)

Date Written: July 2009

Abstract

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.

Keywords: Africa, Caribbean, Competition, Corporate sector, Corporate taxes, Cross country analysis, Developing countries, Economic growth, Foreign direct investment, Investment, Latin America, Tax incentives, Tax rates, Time series

Suggested Citation

Klemm, Alexander and Van Parys, Stefan, Empirical Evidence on the Effects of Tax Incentives (July 2009). IMF Working Paper No. 09/136, Available at SSRN: https://ssrn.com/abstract=1438845

Alexander Klemm (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Stefan Van Parys

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States