جذب سرمایه گذاری بخش خصوصی: کاهش مالیات، یارانه های سرمایه گذاری، و یا هر دو؟

This paper uses a real-option model to examine the net benefit to a government from using tax cut and/or investment subsidy as incentives to induce immediate investment. Although earlier papers generally concluded that investment subsidy dominates tax cut, it is observed that many governments use a combination of subsidy and tax cut. We show that, when the government uses a different discount rate from private firms, and when it has to borrow money to provide an investment subsidy, it is possible to get an internal optimum; that is, it might be optimal for the government to provide an investment subsidy as well as charge a positive tax rate on the profits from the project. Thus, we provide an explanation for the puzzling fact that many governments provide an investment subsidy to a firm while simultaneously taxing its profits.

It is widely accepted that private investment has a significant and positive effect on economic growth (Kim, 1998). Private corporate investment helps reduce unemployment, increases government revenues by way of tax collections, reduces imports and/or increases exports, helps with technology transfer, develops local entrepreneurship, etc. Not surprisingly, governments around the world have stepped up efforts to attract private investment.1 The two methods most commonly used by governments to encourage private investment are tax rate reduction and investment grant/subsidy (Bond and Samuelson, 1986, Nam and Radulescu, 2004, Pennings, 2000 and Yu et al., 2007). This paper compares the efficacy of these two methods, in terms of their ability to attract investment as well as how they impact the net benefit to the government from the investment project. It also examines the optimal combination (from the government's perspective), if any, of these two investment incentives. Of course, tax reduction and investment subsidy should not be viewed as substitutes for strong economic fundamentals and basic “desirable” conditions for investment, such as solid infrastructure, reliable and transparent legal system, adequate property rights, macroeconomic and political stability, and an educated workforce. There has been some research on the relative effectiveness of tax cut versus investment subsidy as investment incentives (Pennings, 2000, Pennings, 2005, Yu et al., 2007 and Zee et al., 2002). Such analyses are useful for governments trying to decide whether to offer tax rate reduction or investment subsidy (or what combination of the two to offer) to spur corporate investment. Zee et al. (2002) stress the importance of cost-effectiveness: a tax reduction is costly because of the forgone tax revenues, but an investment subsidy requires an upfront expenditure by the government and exposes it to the risk of the project turning out to be “unviable;” they conclude (without any quantitative analysis) that the investment subsidy is generally the least meritorious incentive. Pennings (2000) uses a real-option model to study combinations of tax reduction and investment subsidy that a government can use to manipulate the entry trigger for an irreversible investment under uncertainty. He shows that, with a zero-cost combination (that is, the value of the government's tax collections is exactly offset by the subsidy it provides), the entry trigger is a decreasing function of the tax rate (his Eq. (7)). Thus, a higher tax rate (but with a correspondingly higher subsidy, so that the total cost to the government remains zero) will result in a lower investment trigger and will thus accelerate investment. An obvious implication of this result is that the government is better off increasing the tax rate as well as the subsidy; in other words, an investment subsidy is more efficient than a tax cut. This was shown explicitly by Yu et al. (2007), in their Proposition 1: for a given investment threshold, the expected present value of investment subsidy is smaller than that of tax rate reduction. Thus, these models seem to be in agreement that the government will be better off with a full investment subsidy and a high tax rate. However, it is observed that many governments provide investment subsidy and tax reduction at the same time ( Hansson and Stuart, 1989 and Morisset and Pirnia, 2000). Hansson and Stuart (1989) argue that this behavior can be explained if the tax policy is set sequentially by successive governments; however, their explanation does not work for stable tax policies. Pennings (2005) uses a real-option model of FDI (where the firm has the choice of exporting or investing) to explain a government's decision to provide an investment subsidy in combination with a positive tax rate. However, even he finds that the host government will maximize net domestic benefits by nearly fully subsidizing the investment cost in combination with taxing away all benefits that exceed the gains from exporting. Thus, his result is very close to the earlier result of Pennings (2000) and Yu et al. (2007). Pennings (2005) argues that the optimal choice (i.e., maximizing the subsidy and the tax rate) is not observed in practice because of exogenous limits on state aid, i.e., “. . . state aid is often limited to a certain percentage of the investment cost” (page 885), hence a combination of investment subsidy and tax cut is used. This paper shows it can be optimal to use both investment subsidy and tax cut in combination, to encourage immediate investment; however, this result is derived as an endogenous outcome of the model, and not by appealing to an exogenous limit on investment subsidy. Consistent with the large literature on government discount rates, we allow the government's discount rate to be different from the private firm's discount rate. This is where our model differs from earlier studies (Pennings, 2000 and Yu et al., 2007, etc.), in which the two discount rates were the same. This small modeling change can explain simultaneous taxation and subsidization. We show that when the two discount rates are equal, the investment subsidy does dominate, as in Pennings (2000) and Yu et al. (2007). However, when they are different and the government's discount rate is large enough, the result is reversed and tax reduction dominates. Finally, if the government's discount rate is an increasing function of its borrowing (which is quite plausible), then it is possible that the optimal incentive scheme is a combination of investment subsidy and tax reduction. These outcomes are illustrated with numerical examples. The rest of the paper follows the outline below. Section 2 introduces the model, identifies the firm's optimal investment policy and computes the government's net benefit from immediate investment in the project; it also briefly discusses the appropriate discount rate for the government. Section 3 identifies, for various situations, the optimal incentive package (tax cut and investment subsidy) that the government can offer to induce immediate investment in the project; and briefly discusses the properties of this optimal combination, illustrating the results with numerical examples. Section 4 concludes.

In this paper, we examine two common methods of attracting private investment – tax rate reduction and investment subsidy. We identify the combination of tax rate and investment cost necessary to ensure immediate investment, and calculate the government's net benefit from immediate investment in the project. Based on the government's net benefit, it is shown that if the government uses the same discount rate as private firms, investment subsidy dominates tax cut; but if the government's discount rate is sufficiently larger than the private discount rate, tax rate reduction dominates investment subsidy. However, if the government's discount rate increases with the amount of subsidy provided, it is possible to have an internal optimum, i.e., a positive investment subsidy in combination with a positive tax rate. Thus, depending on the government's discount rate, it might be optimal to use just investment subsidy, just tax cut, or both in combination. One benefit of this type of analysis is that it can be used by governments to decide on the appropriate level and combination of incentives to attract investment in the right projects. It is important to ensure that the government does not give away too much value in its quest to attract investment. Also, such analysis will help the government recognize which projects are likely to be implemented anyway, even without any such incentives (e.g., high-growth projects). We certainly do not claim that this is the final word on the issue. Our model is an attempt to quantify the relative cost-effectiveness of investment subsidies and tax reductions in attracting private investment. There are other questions that have to be addressed prior to this analysis. For instance, the government has to decide on the optimal timing of investment (recall that we assume the government prefers immediate investment). We leave such issues for future research.