Are Tax Credits Effective in Developing Countries? The Recent Uruguayan Experience

Cecilia Llambi (cecilia.llambi@gmail.com), Andrés Rius, Fedora Carbajal, Paula Carrasco and Paola Cazulo (paocazu@gmail.com)

Economía Journal, 2018, vol. Volume 18 Number 2, issue Spring 2018, 25-58

Abstract: Investment promotion through tax incentives has been a key component of the growth strategies pursued in Uruguay by the last three administrations. A new regime was estab- lished, regulated by Executive Decree 455, which implemented a major overhaul in the main channel for subsidizing investment. This regime immediately generated a battery of research- able questions about its effectiveness and efficiency. Using a large data set, first put together for this study from firm-level administrative records kept by the tax collection and pensions institutes between 2005 and 2011, we test the hypotheses of significant and positive effects of obtaining a tax credit through the new regime on investment and employment outcomes. A matched difference-in-differences strategy confirms that the promotion regime introduced in 2008 had a statistically significant effect on the firms’ rate of investment (around 11 percent), while the effects on employment growth rate were more ambiguous. These findings are but- tressed by several robustness tests. Further probing uncovers heterogeneity along the promotion timeline, with the greatest effect on the investment rate occurring in a project’s first year.

Keywords: Investment; impact evaluation; tax incentives; Uruguay (search for similar items in EconPapers)
JEL-codes: D04 H25 H32 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Are Taxes Credits Effective in Developing Countries? The Recent Uruguayan Experience (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000425:016331

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