Thursday, July 09, 2009

IMF: Lower corporation taxes and tax holidays may not boost growth

The IMF has issued a new working paper entitled Empirical Evidence on the Effects of Tax Incentives which reaches some conclusions that are contrary to what the IMF so often teaches. And it seems to be an important one, for as the study says:

"While the previous literature has mainly focused on case studies or evidence that focused on incentives used mainly in developed countries, such as R&D tax credits, this study provides the first econometric panel analysis of tax incentives in developing countries."

What? Nobody has seriously studied the effect of tax incentives on developing countries? If they had, perhaps they would have discovered something that the new paper finds. A central conclusion is this:

"We find evidence that lower corporate income tax rates and longer tax holidays are effective in attracting FDI, but not in boosting gross private fixed capital formation or growth. . . their ultimate benefits for the economy may be limited."

Let's not forget that growth is an end in itself, whereas attracting more FDI is a means to an end. So where might the disconnect lie - that more investment through tax incentives does not seem to be feeding through to more growth? The IMF reckons:

"This suggests either crowding out, or, that especially the part of FDI, which concerns transfer of ownership rather than green field investment, is affected."

In short, they are timidly saying that tax incentives don't bring in real plants and machinery - they just help reshape the financial juggling - much of which is abusive to the ordinary taxpayer - that surrounds the real world of business.

As we said of the IMF recently on a related matter: no s***, Sherlock. Do we detect people at the institution rubbing their sleepy eyes in the morning light, as the aroma of coffee drifts in through the window?


Anonymous Frank Roels said...

what the hell is FDI? they talk about it all the time, but give no definition.

7:45 am  
Blogger TJN said...

@ Frank Roels

FDI stands for foreign direct investment, namely investment originating from outside the country into productive activity. Not to be confused with foreign portfolio investment which is investment into the local stock exchange, currency or securities markets.

Best wishes


7:40 am  
Anonymous Sankha Banerjee said...

It is mentioned that more FDI that is coming due to tax incentives/holidays are not greenfield projets(If I understood correctly, does it mean that FDI that are in greenfield projects induce more growth? i.e. greenfield project investments are productive investments that are good for growth of the economy(physical investment)? but probably most of the FDI are transfer of ownership what does it exactly mean? Are these not physical investments? but why they are called then FDI?

12:35 am  
Blogger TJN said...

when the fdi is in a greenfield project, this means someone comes in and builds a factory that makes stuff, for example. This brings jobs, growth, productivity, and all that. But now if we are talking about merely transferring ownership, this is when the factor already exists, and an investor comes along to the current owner and gives him or her a load of money, and becomes the new owner. Money has changed hands, but no new factory has been built: it was already there. Quite often, in fact, jobs are cut.

7:11 am  

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