A test of relative efficacy of tax expenditures and direct expenditures: A neo-classical approach

Abstract

This paper uses neo-classical investment theory and time series data for Pakistan's Manufacturing Sector to test the relative efficacy of tax expenditure and direct expenditure to boost private non-residential investment. The result shows that the tax policy through cost of capital and expenditure policy through public investment are important determinants of private investment. It is argued that although both tax and expenditure policies are successful, the tax expenditure (depreciation allowances) is more effective than direct expenditure. This paper also argues that the economic estimates of tax expenditure are very high implying that most of the benefits of tax expenditure go to those investors who would have invested even in the absence of these concessions.