Tax Credits for Debt Reduction

Michael Dooley and Elhanan Helpman

No 3137, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The incentives for domestic investment in debtor countries are influenced by the terms of their external obligations and by the system of taxation utilized to provide government revenue for debt payments. It is well known that existing debt contracts could be altered to improve the incentives for investment but this has proven difficult to accomplish, perhaps because individual creditors have incentives not to agree to such changes. In this paper we show that a simple tax credit scheme that can be implemented unilaterally by the debtor government can overcome at least some of the inefficiencies caused by existing debt contracts.

Date: 1989-10
Note: ITI IFM
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Published as Journal of International Economics, Vol. 32, pp. 165-177, (1992).

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