Optimal Tax/Expenditure Competition Strategy of Governments in the Presence of Time Inconsistency

The Case for Investment Tax Abacemencs

• Author(s): International Monetary Fund,
• Publisher: International Monetary Fund
• Pages: 20
• ISBN_10: 145196563X
  ISBN_13: 9781451965636
  
• Language: en
• Categories: Business & Economics / Public Finance , Business & Economics / Investments & Securities / General , Business & Economics / Taxation / Corporate ,

Description:... 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.