Optimal Tax/Expenditure Competition Strategy of Governments in the Presence of Time Inconsistency: The Case for Investment Tax Abatements

19 Pages Posted: 15 Feb 2006

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Daniel Hewitt

affiliation not provided to SSRN

Date Written: July 1990

Abstract

Businesses which seek the location that offers the highest profitability are likely to consider tax incentives and the level of government services available. However, once a business commits itself to a locality, high moving costs render it vulnerable to future tax increases or denial of government services. Fear of time inconsistency will lower expected business profitability in a region. This paper indicates that a developing country or locality can attract a higher level of capital with a tax abatement scheme which provides a subsidy (funded by a capital income tax) equivalent to moving/setup costs.

JEL Classification: 320, 323, 324

Suggested Citation

Hewitt, Daniel, Optimal Tax/Expenditure Competition Strategy of Governments in the Presence of Time Inconsistency: The Case for Investment Tax Abatements (July 1990). IMF Working Paper, Vol. , pp. 1-19, 1990. Available at SSRN: https://ssrn.com/abstract=884875

Daniel Hewitt (Contact Author)

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