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

International Monetary Fund

No 1990/059, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; government; abatement policy; rate of return (search for similar items in EconPapers)
Pages: 20
Date: 1990-01-01
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