Testing the Impacts of Tax Incentives (Evidence in Enhancing Tax Competition, Investment Attraction and Increasing Economic Growth)

In this paper, we focus on two major questions about tax incentives: 1) Do the countries compete over tax incentives in a same way as they compete over tax rates?; 2) Do the offered tax incentives results in attracting investment and increasing economic growth? The results of testing the first question, in which spatial econometric technique for panel data and Maximum Likelihood Estimation (MLE) Method were used, indicate that the developing countries compete over tax rates and tax holidays (and don’t compete over investment rebates); In other words, governments consider other states’ tax policies as a benchmark for judging their own tax policies. The results of testing the second question, in which econometric techniques of dynamic data and Generalized Moments Method (GMM) were used, indicate that tax rates and tax holidays influence foreign direct investment while investment rebates don’t have such an effect and only tax rates have significant relationship with private sector investment and economic growth. Tax incentives which were tested here include tax rates reduction, tax holiday and investment rebates and empirical evidence is based on time period 1985- 2008 and the data for 45 developing countries.