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

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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?

Hat tip: above from the TJN blog - and well worth reproducing - with thanks

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