dokuz eylul university , faculty of business eco 4113 fiscal economics prof...

Dokuz Eylul University, Faculty of Business ECO 4113 FISCAL ECONOMICS Prof. Yeşim KUŞTEPELİ 12.12.2012

‘’ The Effects of taxes on investment ‘’

Gizem Berghan , Cansu Yetek , Cenk M. Çakmak

Framework;Framework;FDI and TaxationTaxes and Entrepreneur’s

InvestmentEffects of Tax Incentives on

InvestmentTypes of Tax Incentives

AbstractAbstractTaxes affect investments with

many different dimensions which are savings, consumptions and private sector’s investments.

Taxes are decreasing savings with dropping funds which are readiness to investment.

INTRODUCTIONINTRODUCTIONHow sensitive is foreign direct investment (FDI) to taxation?

How does tax planning factor in?

What are the effects of taxes on entrepreneurs?

What are the tax incentives’ effect on investment?

• Income & corporation tax• Investment reduction• Amortization methods and rates• Taxes of increasing values• Nondistributed corporation tax • Taxation of partnership's gain• Customs Union• Expenditure taxes

Tax Measures Which Effect Tax Measures Which Effect Investment Decisions;Investment Decisions;

Tax policy has three Tax policy has three elements; elements; Firstly, tax policy increases

competition power of individual and bussinesses, so foreign direct investment will increase.

Secondly, investors want to choose a suitable tax policy for their portfolio.

Thirdly, tax incentives supplies many tax advantages for countries, tax incentives are in all countries system.

FDI and TaxationFDI and Taxation

Foreign direct investment had started from colonialism period and all countries give an importance these investments nowadays, because investment is a kind of capital and all countries purpose to finance their deficits with foreign direct investment like education deficit, tax deficit, balance of payment deficit.

FDI and TaxationFDI and TaxationAll governments are keen to

attract foreign direct investment (FDI). Because, it can generate new jobs, bring in new technologies and, more generally, promote growth and employment.

FDI and TaxationFDI and TaxationTax policies may also support

direct investment abroad, as outbound investment may provide efficient access to foreign markets and production scale economies, leading to increased net domestic income.

How sensitive FDI to How sensitive FDI to taxation?taxation? Foreign direct investment supplies

know-how transfer, technology transfer and eceonomic growth for all countries.

For example; FDI decreases by 3.7% following a 1% increase in the tax rate on FDI.

Recent analysis supports the view that the sensitivity of FDI to tax depends on the host country and the mobility of business activities underlying the tax base.

How does tax planning How does tax planning factor in?factor in?FDI ignore tax-planning

strategies used by investors to lower their tax burden.

tax planning can significantly reduce the tax burden on FDI.

TAXES AND TAXES AND ENTREPRENEUR’S ENTREPRENEUR’S INVESTMENT INVESTMENTTaxation of individuals who are self-

employed can affect levels of entrepreneurship in a number of ways.

For instance, self-employed individuals who are involved in starting businesses are subject to personal income tax while their reinvested earnings in the firm could be subject to capital gains tax at the disposition of their assets.

Effective corporate tax rates have a large and significant adverse effect on corporate investment and entrepreneurship.

This effect is robust if we control for other tax rates,including personal income taxes and the VAT and sales tax, for measures of administrative burdens, tax compliance, property rights protection, regulations, economic development, openness to foreign trade, seignorage, and inflation.

Taxation of Taxation of EntrepreneurshipEntrepreneurship1.Estate and inheritance taxes

2. Taxes on capital gains3. Taxes on entrepreneurial capital

Taxes can affect the choice between Taxes can affect the choice between becoming an entrepreneur and remaining in becoming an entrepreneur and remaining in employment. This can happen in two ways:employment. This can happen in two ways:

1.The tax system undermines the key means by which new businesses are

financed. 2. The high rewards that justify

the risks associated with becoming an entrepreneur.

Negative effects on Negative effects on entrepreneurs entrepreneursHigher tax rates discourage

economic growth and job creation by reducing business owners’ incentives to expand their businesses

Higher marginal tax rates lower incentives by reducing profits, but also increase tax avoidance creating a mixed impact on self-employment.

In addition, businesses that have the potential to generate wealth and jobs through rapid growth often need external capital. Much of this money comes from informal investors – friends, family, and business angels.

Unequal corporate and individual income taxes can create distortions

The U.S. has the second-highest statutory corporate tax rate among developed nations. High corporate taxes deter foreign investment, and in theory lowers the valuation of U.S. based companies.

Effect of tax incentives on Effect of tax incentives on investmentinvestmentTax incentives are any kind of

deductions, exclusions or exemptions from a tax liability offered as an enticement to engage in a specified activity for a certain payment.

Governments can quickly and easily change the range and extent of the tax incentives they offer to attract foreign investors or encourage domestic investment.

Optimum balance is point A without tax and then tax is Optimum balance is point A without tax and then tax is applied about "t", so investment goes from I* to Io and applied about "t", so investment goes from I* to Io and balance occurs in point B , if we want to go back point A, balance occurs in point B , if we want to go back point A, taxes must be decreased. This graph shows that; tax taxes must be decreased. This graph shows that; tax incentives increase investments.incentives increase investments.

Effect of tax incentives on Effect of tax incentives on investmentinvestment

Types of tax incentivesTypes of tax incentivesReduced corporate income tax

rateLoss carry forwardsTax holidaysInvestment allowancesInvestment tax creditsReduced taxes on dividends and

interest paid abroadDeductions for qualifying

expensesZero or reduced tariffsEmployment-based deductions

CONCLUSIONCONCLUSIONIn general, taxes affect investments

with many different dimensions which are savings, consumptions and private sector’s investments.

Taxes modify distribution of savings which are used in investment, so it gives rise to effect investment capacity.

Investments supply many conveniences for countries which are know-how transfer, technology transfer, increasing production capacity, increasing exports.

In general, countries’ tax policy covers these things;

Financing of economic development

Equity in income distributionEconomic efficieny Economic stability

In addition to these concepts countries make some arrangements on their tax policy like investment allowance, tax credit, tax holidays, tax incentives and tax cuts.

Investment returns a profit for countries and if they want to have a profit maximization, it occurs with decreasing tax burden. Therefore, if one country's tax policies are applicable and rational, investment will as much possible for a country.

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