Do tax policies stimulate investment in physical and research and development capital?
) No 689, Policy Research Working Paper Series from The World Bank Abstract: Tax policy instruments are often used to stimulate private investment in developing countries. But researchers have not explored how well such policies have met stated policy objectives. To evaluate the cost-effectiveness of tax incentives for industrial and technological development, the authors specify a dynamic production structure model with endogenous capacity utilization. Taxes and incentives are part of the user cost of capital, and thereby affect producer decisions about choice of inputs, technology, and capital accumulation. Empirical estimates of this model allow one to infer both the impact of investment incentives and their implications for revenues foregone by the government. The model results yield an objective, empirically derived cost-benefit ratio that is superior to standard cost-benefit analysis and King-Fullerton type marginal effective tax rate analysis. The authors apply this model empiri
