Investment Disincentives Research Articles

Domestic Taxes and the External Debt Laffer Curve

This paper highlights the role of the domestic tax system in determining the economic consequences of an external debt overhang. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of the debt Laffer curve. A simple taxation scheme is specified, and it is shown that a country can be on the ‘wrong side’ of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve.

Investment disincentives in Russia

(1996). Investment disincentives in Russia. Communist Economies and Economic Transformation: Vol. 8, No. 1, pp. 29-51.

Reforming taxation of business for rationalisation and inflation-neutrality

Taxation of business in South Africa needs reforming to avoid inflationary distortions and investment disincentives. Inflation adjusted income has largely been abandoned as a feasible tax base. Taxing both corporate and non-corporate business income at a flat rate on the basis of cash flow provides a possible solution. This would result in improved fiscal equity, neutrality, and simplicity, and has been advocated by distinguished economists for the past 120 years.

International Petroleum Taxation in the 1990s

Since the major oil price explosion and collapse over the last 20 years, host governments in producing countries have made substantial changes to their petroleum tax systems. In many cases, these changes have resulted in more profit-related systems being established. These have an inherent flexibility which is more appropriate for an environment of fluctuating prices. They are generally not accurately targeted on economic rents, however, and if oil prices remain low further discretionary changes may be required. In some important countries, reliance on old-style systems targeted on gross revenues still remains. These are not well adapted to an era of low oil prices, and investment disincentives are present.

Debt relief schemes and welfare

This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results. (JEL F34).

Sovereign Debt Relief Schemes and Welfare

This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results.

Sovereign Debt Relief Schemes and Welfare

This paper shows that concerted debt reduction may be welfare-improving even when the investment disincentive effect of a debt overhang is not large enough to place the debtor country on the wrong side of the debt Laffer curve. Whether the appropriate relief scheme involves debt reduction or new money, however, depends on whether investment disincentives or liquidity constraints dominate. It is shown that, except under very special circumstances, mixed policy packages involving both debt and liquidity relief may not yield the desired results.

Distortionary Taxation and the Debt Laffer Curve

This paper highlights the importance of the role of the domestic tax system in determining the economic consequences of an external debt overhang. A simple taxation scheme is specified and it is shown that a country can be on the “wrong side” of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of its debt Laffer curve.

Distortionary Taxation and the Debt Laffer Curve

This paper highlights the importance of the role of the domestic tax system in determining the economic consequences of an external debt overhang. A simple taxation scheme is specified and it is shown that a country can be on the “wrong side” of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of its debt Laffer curve.

Investment incentives and risk sharing properties of debt and equity contracts in international financial markets

This paper examines the risk sharing and investment incentive properties of debt and equity contracts in international financial markets. Using a Nash bargaining framework between the borrower and its lenders, debt repayment after renegotiation is derived. Renegotiable debt contracts provide better investment incentives than equity contracts, when the level of debt is not very high. For high levels of debt, when repayment due is above a renegotiated debt repayment, disincentives for investment arise. Risk sharing between lenders and borrowers is better under equity contracts when investment takes place and debt contracts are not renegotiated.

LDC Debt: Forgiveness, Indexation, and Investment Incentives

ABSTRACTWe compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.

ECONOMIC EFFICIENCY IN RECENT TAX REFORM HISTORY: POLICY REVERSALS OR CONSISTENT IMPROVEMENTS?

The Economic Recovery Tax Act of 1981 reduced personal marginal tax rates and provided significant business tax breaks. Subsequent changes through 1985 cut back on business allowances. The Tax Reform Act of 1986 reduced marginal rates again, but added significantly to business taxes. Was there any unifying theme to these tax changes, or do they represent frequent changes in course for tax policy? This paper uses a general equilibrium model capable of second- best analysis to investigate the net effects on efficiency of each of these changes in capital income taxation. Under the new view that dividend taxes are unimportant investment disincentives, there is no set of other parameters in the model for which these changes generate improvements in efficiency. Under the old view that dividend taxes are important, however, these changes all increase efficiency for a wide range of values for other parameters in the model.