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Optimal pollution and foreign-investment taxes in a small open economy

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  • Chi-Chur Chao
  • Eden Yu

Abstract

This paper examines pollution and foreign-capital tax policies on the host country's welfare when foreign-investment tax credits are absent or present in the source country. In the absence of tax credits, the optimal policy is a pollution tax with a foreign-investment tax or subsidy. The presence of tax credits may, however, result in a higher investment tax but a lower pollution tax, leading to higher welfare but lower environmental quality in the host country. The source-country's tax credits may cause a switch in the host-country's capital subsidy to a tax, which may improve the environment.

Suggested Citation

  • Chi-Chur Chao & Eden Yu, 1998. "Optimal pollution and foreign-investment taxes in a small open economy," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 7(1), pages 71-85.
    • Handle: RePEc:taf:jitecd:v:7:y:1998:i:1:p:71-85
    DOI: 10.1080/09638199800000005
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    References listed on IDEAS

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    1. Ethier,Wilfred J. & Helpman,Elhanan & Neary,J. Peter (ed.), 1993. "Theory, Policy and Dynamics in International Trade," Cambridge Books, Cambridge University Press, number 9780521434423.
    2. Wayne B. Gray, 1997. "Manufacturing Plant Location: Does State Pollution Regulation Matter?," NBER Working Papers 5880, National Bureau of Economic Research, Inc.
    3. Anderson, James E & Bannister, Geoffrey J & Neary, J Peter, 1995. "Domestic Distortions and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 139-157, February.
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    Cited by:

    1. Yasuyuki Sugiyama & Muneyuki Saito, 2008. "Ecological dumping under foreign investment quotas," Discussion Papers in Economics and Business 08-31, Osaka University, Graduate School of Economics.
    2. Costas Hadjiyiannis & Panos Hatzipanayotou & Michael S. Michael, 2002. "Optimal Tax Policies with Private-Public Clean-Up, Cross-Border Pollution and Capital Mobility," CESifo Working Paper Series 822, CESifo.
    3. Yasuyuki Sugiyama & Muneyuki Saito, 2009. "Ecological dumping under foreign investment quotas," Journal of Economics, Springer, vol. 98(2), pages 137-153, November.

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