This article intends to re-examine the much-debated issue of the direct investment incentives. In the light of the recent economic literature, we discuss the following questions: what are the expected effects of the public aid as a whole? How to avoid the pitfalls that are often induced by such a public intervention? We then argue that the choice of implementing a particular incentive, either a capital subsidy or a tax cut, should not be made without considering some important determinants like the characteristics of the capital markets, the fiscal treatment of losses or the rules of international taxation. The debate between neutrality and efficiency is also discussed. Finally, we highlight the usefulness of indicators derived from the models of effective taxation for the policymaking process. The last part of the paper is devoted to an application. We measure the cost of capital and the effective average tax rate to evaluate the relative efficiency of rival policy instruments. We argue that the granting of a capital subsidy should certainly not be too quickly ruled out.
|Number of pages||15|
|Journal||Reflets et perspectives de la vie économique|
|Publication status||Published - 1 Jan 2004|