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Dynamic inconsistency and non-preferential taxation of foreign capital

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  • Kishore, Kaushal
  • Roy, Santanu

Abstract

When capital is sunk after it is invested, a host government facing heterogeneous foreign investors has a strong incentive to reduce preferential taxes over time in order to attract less eager investors while fully expropriating past investors. This induces investors to wait rather than invest in the initial period, and leads to loss of tax revenue. This dynamic inconsistency problem is resolved if the host government commits to non-preferential taxation in each period even if it does not commit to future tax rates.

Suggested Citation

  • Kishore, Kaushal & Roy, Santanu, 2014. "Dynamic inconsistency and non-preferential taxation of foreign capital," Economics Letters, Elsevier, vol. 124(1), pages 88-92.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:1:p:88-92
    DOI: 10.1016/j.econlet.2014.04.027
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    References listed on IDEAS

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    Cited by:

    1. Kaushal Kishore, 2016. "Dynamic Inconsistency, Falling Cost of Capital Relocation and Preferential Taxation of Foreign Capital," Working Papers 201633, University of Pretoria, Department of Economics.
    2. Kaushal Kishore, 2016. "Are Preferential Tax Holidays Dynamic Inconsistent?," Working Papers 201630, University of Pretoria, Department of Economics.
    3. Haupt, Alexander & Krieger, Tim, 2020. "The role of relocation mobility in tax and subsidy competition," Journal of Urban Economics, Elsevier, vol. 116(C).
    4. Kaushal Kishore, 2017. "Dynamic inconsistency and preferential taxation of foreign capital," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 381-396, June.
    5. Kaushal Kishore, 2016. "Dynamic Tax Competition, Home Bias and the Gain from Non-preferential Agreements," Working Papers 201676, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Dynamic inconsistency; Foreign investment; Non-preferential taxation;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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