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International Tax and Public Finance

, Volume 19, Issue 3, pp 393–423 | Cite as

Empirical evidence on the effects of tax incentives

  • Alexander Klemm
  • Stefan Van Parys
Article

Abstract

This paper considers two empirical questions about tax incentives: (i) are incentives used as tools of tax competition and (ii) how effective are incentives in attracting investment? To answer these, we prepared a new dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004. Using spatial econometrics techniques for panel data to answer the first question, we find evidence for strategic interaction in tax holidays, in addition to the well-known competition over the corporate income tax (CIT) rate. We find no robust evidence, however, for competition over investment allowances and tax credits. Using dynamic panel data econometrics to answer the second question, we find evidence that lower CIT rates and longer tax holidays are effective in attracting FDI in Latin America and the Caribbean but not in Africa. None of the tax incentives is effective in boosting gross private fixed capital formation.

Keywords

Tax incentives Tax competition Investment Developing countries 

JEL Classification

H25 H87 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Faculteit Economie en BedrijfskundeGhent UniversityGentBelgium
  2. 2.European Central BankFrankfurtGermany

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