PROMOTING INVESTMENT UNDER INTERNATIONAL CAPITAL MOBILITY - AN INTERTEMPORAL GENERAL EQUILIBRIUM-ANALYSIS

Efficiency and distributional effects of two investment-oriented policies, an investment tax credit (ITC) and a reduction in the statutory corporate income tax rate, are compared using a disaggregated general equilibrium model that uniquely combines intertemporal decision-making and international capital mobility. The domestic welfare consequences of these policies depend not only on intertemporal and intersectoral efficiency effects but also on international transfer effects which favor (in terms of domestic welfare) the ITC over cuts in the corporate tax rate. Simulations reveal important differences between policies in the consequences for balance of payments accounts, the real exchange rate and industrial structure.