Investment Tax Credit

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper provides an updated overview of tax incentives for business investment. It begins by noting that tax competition is likely to be a major force driving countries' tax reforms, and discusses tax incentives as a possible response to this. This is complemented by other arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country's circumstances.

Sustainable economic development requires the efficient production and use of energy. Combined heat and
power (CHP) offers a promising technological approach to achieving both goals. While a recent U.S. executive
order set a national goal of 40 GWof new industrial CHP by 2020, the deployment of CHP is challenged by financial,
regulatory, and workforce barriers. Discrepancies between private and public interests can be minimized by
policies promoting energy-based economic development. In this context, a great deal of rhetoric has addressed
the ambiguous goal of growing “green jobs.” Our research provides a systematic evaluation of the job impacts
of an investment tax credit that would subsidize industrial CHP deployment. We introduce a hybrid analysis approach
combining simulations using the National Energy Modeling System with Input–output modeling. NEMS
simulates general-equilibrium effects including supply- and demand-side resources.We identify first-order employment
impacts by creating “bill of goods” expenditures for the installation and operation of industrialCHP systems.
Second-order impacts are then estimated based on the redirection of energy-bill savings accruing to
consumers; these include jobs across the economy created by the lower electricity prices that would result
from increased reliance on energy-efficient CHP systems. On a jobs-per-GWh basis, we find that the secondorder
impacts are approximately twice as large as the first-order impacts.

This paper investigates the effectiveness of investment incentives and corporate income taxes in influencing production and investment decisions in the Pakistani wearing apparel and leather products industries. Three tax instruments are considered: the corporate income tax (CIT), the investment tax credit (ITC), and the capital cost allowance (CCA). The results show that since there are significant capital adjustment costs, it is important to distinguish between the short, intermediate, and long-run effects associated with the tax instruments. Production decisions are relatively more responsive to changes in the ITC rate compared to changes in either CCA or CIT rates in each run. However, only in the long run for the apparel industry are the ITC and CCA rates cost effective in stimulating investment. The CIT is never cost effective. Thus targeted instruments outperform the general CIT instrument. In addition, although the incentive to invest is enhanced, there is little effect on output. Therefore, tax incentives essentially make production techniques more capital intensive.