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- Title
ALTERNATIVE POLICIES FOR FOREIGN INVESTMENT IN THE PRESENCE OF TARIFF DISTORTIONS.
- Authors
Tain-Jy Chen
- Abstract
This paper extends the work of Hamilton and Svensson (1985) and Brecher and Findlay (1982). It generalizes the welfare results and provides major findings regarding the tax policy for foreign investment. Under the DZ setting, a tax on the return to foreign investment is shown to be the optimal policy while the tariff is irremovable. Although Brecher and Findlay (1982) reached this conclusion, this paper first derives the magnitude of the tax rate and shows the variables that influence this magnitude. The paper shows that under the DFZ setting, a subsidy to foreign investment is optimal, provided that the host country also prevents foreign firms from paying the tariff-protected goods as wages. The plan of this paper is as follows: In section II the author derives the welfare effect of foreign investment in the domestic zone, with and without a tax levied on the returns to foreign capital, assuming that the volume of foreign investment is exogenous. In section III he endogenizes foreign investment and derives the optimal tax rate on the returns to foreign capital. In section IV he extends and compares these results to a duty-free zone, and in section V offers some concluding remarks.
- Subjects
TAXATION of foreign investments; ECONOMIC policy; TARIFF
- Publication
Australian Economic Papers, 1985, Vol 24, Issue 45, p394
- ISSN
0004-900X
- Publication type
Article
- DOI
10.1111/j.1467-8454.1985.tb00126.x