Tax Incentives and Investment in the Eastern Caribbean
IMF Working Papers, January 1, 2006
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Bibliographic details
- Authors: Sebastian Sosa
- Published: January 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451862836.001
Overview
- Author: Sebastian Sosa
- Publication date: January 1, 2006
- Paper type: IMF Working Paper (Working Paper No. 2006/023)
- Abstracted conclusion: Tax incentives have been used extensively in the countries of the Eastern Caribbean Currency Union (ECCU) to promote investment; associated revenue losses are large and benefits in terms of new investment have been limited, raising doubts about the cost effectiveness of the tax incentive schemes.
Methodology
- Analytical approach: Marginal effective tax rate (METR) approach, adapted to the case of a small open economy where the marginal investor is a nonresident.
Key findings
- METRs are high in the region.
- There is a large dispersion in the size of METRs across financing source.
- METRs on investment are larger than the overall distortion on capital.
- There is a substantial subsidy to domestic saving.
- In the presence of tax holidays—the most common incentive scheme in the region—the distortion on capital basically vanishes.
- Overall implication: Limited benefits in terms of new investment relative to large revenue losses, raising doubts about cost effectiveness of existing tax incentive schemes.
Policy implications / Interpretive points
- Tax holidays, while common, effectively eliminate the distortion on capital according to the METR analysis.
- The large dispersion of METRs across financing sources and the substantial subsidy to domestic saving suggest uneven and potentially inefficient incentive outcomes.
- The combination of high METRs and limited investment response implies that revenue forgone from incentives may not be justified by investment gains.