International Tax Competition and Tax Incentives in Developing Countries

Tax policy advisers often counsel the governments of developing countries against using investment incentives under their income taxes. A wide variety of arguments have been offered in support of this position. Investment tax incentives can be costly in revenue terms, generating relatively little new investment per dollar of revenue cost and requiring increases in other distortionary taxes; this is especially problematic if the incentives are general (untargeted), so that they benefit a great deal of inframarginal investments, including those that generate significant economic rents. Non-uniform investment incentives that apply only to certain types of capital assets or firms and thus only to certain business sectors may inefficiently distort the allocation of productive resources.Working Paper Number 04-40

The Incidence of the Local Property Tax: A Re-evaluation

The article identifies the key assumptions that underlie competing theories of the incidence of the local property tax. We conclude that the"benefit view" which maintains that the property tax system is equivalent to a set of non-distortionary user changes is correct only under very restrictive assumptions. Only when communities adopt a set of exact, binding zoning requirements will a distortionary tax be transformed into a lump-sum tax. We argue that within jurisdiction heterogeneity of house and firm typeis very unlikely and that the burden of a property tax that is distortionary at the margin falls on the owners of capital.

The New View of the Property Tax: A Reformulation

The"new view" of the property tax is reformulated within the context of a model with interjurisdictional competition, endogenous local public services, individuals who are segregated into homogeneous communities according to tastes for local public services, a simple form of land use zoning, and a political or constitutional constraint on the use of head taxes by local governments. Expressions for the "profits tax" and"excise tax" effects of the property tax are derived. The effects of a "consumption distortion" away from government services due to local reluctance to tax mobile capital are also examined.

Implementing direct consumption taxes in developing countries

This report examines the possibility of using a direct tax on consumption as a replacement for an existing income tax within the context of a developing country. The structural differences between income and consumption taxes are described, and some simple examples are used to illustrate the basic differences in the taxation of businesses and individuals under the two approaches. The report includesa brief survey of the extensive literature on the choice between income and consumption as the basis for a system of direct taxation. After a detailed discussion of the choice between cash flow and tax prepayment treatment at the individual level under a direct consumption tax, the analysis concludes that for simplicity reasons the individual tax prepayment approach is the more appropriate one in the developing country context. The report then describes the structure and implementation of such a direct consumption tax. The discussion includes an examination of international and transitional issues, and also comments on the desirability and feasibility of supplementary wealth taxes and taxation on a presumptive basis.Environmental Economics&Policies,Economic Theory&Research,Public Sector Economics&Finance,Banks&Banking Reform,International Terrorism&Counterterrorism

Tax Competition and the Efficiency of "Benefit-Related" Business Taxes

We construct a tax competition model in which local governments finance business public services with either a source-based tax on mobile capital, such as a property tax, or a tax on production, such as an origin-based Value Added Tax, and then assess which of the two tax instruments is more efficient. Many taxes on business apply to mobile inputs or outputs, such as property taxes, retail sales taxes, and destination-based VATs, and their inefficiency has been examined in the literature; however, proposals from several prominent tax experts to utilize a local origin-based VAT have not been analyzed theoretically. Our primary finding is that the production tax is less inefficient than the capital tax under many — but not all — conditions. The intuition underlying this result is that the efficiency of a user fee on the public business input is roughly approximated by a production tax, which applies to both the public input and immobile labor (in addition to mobile capital). In marked contrast, the capital tax applies only to mobile capital and is thus likely to be relatively inefficient

Impuestos a las Utilidades e Inversión EXtranjera Directa en Colombia

Colombia, como los demás países emergentes, enfrenta un ambiente económico internacional crecientemente competitivo, caracterizado por la mayor movilidad de capital tangible e intangible, de la fuerza laboral (especialmente la calificada) y por una vigorosa competencia en bienes y servicios transables. La mayor globalización implica que la interacción con las demás economías del mundo jugará un papel central en el crecimiento económico del país y en el ingreso futuro de los colombianos. Se analiza en este Capítulo el papel que juegan los impuestos en atraer la inversión extranjera directa (IED) hacia Colombia, uno de los múltiples aspectos de esa competencia internacional. Hoy día la competencia por capital móvil es un componente esencial del panorama fiscal en todos los países, especialmente en aquellos con alta dependencia de la inversión extranjera directa (IED). Solo se tendrá éxito si todas las políticas ?incluidas las impositivas1? conducen a atraer y retener las firmas multinacionales. Puesto que la evidencia internacional reciente sugiere que la IED ha tenido un impacto positivo sobre el crecimiento económico en América Latina,2 puede argumentarse que el sistema tributario debería minimizar los desincentivos a su ingreso. La política impositiva está lejos de ser el único factor que afecta las decisiones de inversión de las multinacionales, y por ello conviene discutir la influencia relativa de esos otros factores antes de entrar en materia. La literatura disponible sugiere que los impuestos no se encuentran entre los factores más importantes en la decisión de las multinacionales en materia de localización. Wheeler y Mody (1992), por ejemplo, construyen un modelo empírico sobre la localización y nivel de la IED y atribuyen el peso central a los costos laborales, el tamaño del mercado, la calidad de la infraestructura y las potenciales economías de aglomeración, factores todos ellos más importantes que los impuestos. Las conclusiones son relativamente similares para otros trabajos sobre América Latina (Shatz y Venables, 2000; Shatz, 2001; Esquivel y Larraín, 2001; Vial, 2001).

Balancing act: weighing the factors affecting the taxation of capital income in a small open economy

Alternative economic theories yield dramatically different prescriptions for optimal capital taxation in small open economies. On the one hand, foreign firms, including those with investments that yield firm-specific above-normal returns, have a large number of alternative investment opportunities; this suggests that the supply of foreign direct investment is highly elastic, which implies that small open economies should avoid imposing any source-based taxes on capital income. On the other hand, governments invariably want to tax any above-normal returns earned by location-specific capital, especially if the returns accrue to foreigners, and to take full advantage of the potential revenue increase from any “treasury transfer” effect that arises due to residence-based tax systems with foreign tax credits, such as that utilized by the United States. These factors suggest that investment is highly inelastic with respect to capital taxation, so that source-based capital income taxation is desirable; indeed, in one special case, the capital income tax rate for a small open economy should equal the relatively high US tax rate. Moreover, this difficult trade-off is in practice complicated by numerous additional factors: deferral of unrepatriated profits and cross-crediting of foreign tax credits for US multinationals, foreign direct investment from firms from countries that, unlike the United States, operate territorial systems, and the existence of opportunities for both international capital income shifting and labor income shifting. In this paper, we analyze optimal capital income taxation in a small open economy model that attempts to balance these conflicting factors

The Dynamic Effects of Eliminating or Curtailing the Home Mortgage Interest Deduction

The authors examine the potential dynamic fiscal effects of revising or completely eliminating the home mortgage interest deduction. This paper was presented at the National Tax Associations Annual Conference on Nov. 9-11, 2017