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Tax policy options to promote private capital formation in Pakistan

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  • Feltenstein, Andrew
  • Shah, Anwar

Abstract

The authors developed a simple two-period general equilibrium model to analyze the macroeconomic impact of tax policies in Pakistan. They analyze two scenarios. In scenario 1, the investment tax credit rate is increased from 15 percent to 30 percent. The new fiscal regime increases investment but also significantly increases inflation. In scenario 2, the original investment tax credit rate is retained but the statutory corporate tax rate is reduced. Welfare improves more than under scenario 1. The authors conclude that in Pakistan, at least, changes in corporate tax rates are probably better instruments for promoting capital formation than are increased investment tax credits. In particular, cuts in corporate taxes improve welfare more than do increases in investment tax credits. Increasing the investment tax credit stimulates more capital formation than does decreasing corporate taxes, but the tax credits also have significant macroeconomic consequences.

Suggested Citation

  • Feltenstein, Andrew & Shah, Anwar, 1991. "Tax policy options to promote private capital formation in Pakistan," Policy Research Working Paper Series 698, The World Bank.
    • Handle: RePEc:wbk:wbrwps:698
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    References listed on IDEAS

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    5. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
    6. Feltenstein, Andrew & Morris, Stephen, 1988. "Fiscal stabilization and exchange rate instability," Policy Research Working Paper Series 74, The World Bank.
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