رفاه، مالیات و سرمایه گذاری خارجی
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|12156||2006||17 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Economic Dynamics and Control, , Volume 30, Issue 6, June 2006, Pages 1045-1061
R&D-based growth models imply a positive growth effect of foreign investment through the introduction of new technologies. However, it has been shown that in an economy without taxes, national welfare may decrease due to the transfer of profits to foreigners. This paper investigates whether the introduction of a tax on profits warrants a positive welfare effect of foreign investment. It is shown that the welfare effect of foreign investment may be negative due to the existence of transfers of profits to foreigners even when the domestic economy is following the optimal tax policy.
Recent literature on growth theory emphasizes technological change as the engine of growth. This has given new strength to those who defend opening the economy to foreign direct investment (FDI). Foreign investors bring better technologies, increasing the rate of growth. Empirical studies, such as Barrel and Pain (1997) and Borensztein et al. (1998), also seem to indicate a positive growth effect of foreign investment. The strength of the theoretical and empirical results that FDI increases growth leads many economies to attract FDI with subsidies. The fact that an increase in growth does not necessarily imply an increase in welfare is often forgotten. Following a suggestion of Feenstra (1996, Section 6.2), Reis (2001) shows for an economy with no taxes or subsidies that the welfare effect of foreign investment may be negative due to the transfer of profits to foreigners. This may dominate the positive effect of the increase in growth caused by a decrease in the cost of introducing new goods in the economy. Taxing profits could reduce the transfer of profits and change this result. This paper studies whether following the optimal tax policy warrants a positive welfare effect of FDI in an economy where the main effect of foreign investment is a decrease in the innovation cost. To this end, the first step is to determine the optimal tax in the economy open to foreign investment. I do this in a simple endogenous growth model designed to address the effect on growth of a technological upgrade brought about by foreign investment. In this model a tax/subsidy on profits is equivalent to a subsidy/tax to investment on R&D. The optimal policy may be to tax profits to reduce the transfer to foreigners or to subsidize investment in R&D due to the technological advantages brought about by this investment. Because in this paper profits are just the return on investment, the results on the optimal tax may be related to the results on the optimal taxation of capital income. For dynamic models of closed economies, Judd (1985) and Chamley (1986) showed that the optimal tax on capital income is asymptotically zero, and recently Judd (2002) defended that the result is strengthened when imperfect competition is considered; in this case the optimal tax may be negative. Guo and Lansing (1999) extended Judd's analysis to consider several features of fiscal behavior and showed that the optimal tax rate may be positive or negative; it may be positive if there are pure profits which cannot be taxed separately. As noted by these authors ‘the capital tax in Judd's model represents an effective tax rate that subsumes the various features of the tax code that influence the investment decision’. The tax on profits in this paper should be understood in a similar way. For endogenous growth models, but still for closed economies, Jones et al. (1993) restate the result of a zero asymptotic tax rate on capital income as long as there are no pure profits. Gordon and Hines (2002) evaluate recent research on taxation in an open economy. In Section 5.2.3. they consider the role of R&D and its implication of positive profits. However, its relationship with growth is not addressed.1 I consider an endogenous growth model and show that when investment is foreign there is an additional reason that may lead to a positive optimal tax on investment income.2 The welfare effect of foreign investment was studied long ago by Bhagwati and Brecher (1981). In their paper foreign investment increases the stock of physical capital.3 However, when technological development is brought to the center of the analysis, the meaning of investment changes. If investment means better capital, or better technology, then ‘new investment’ may crowd-out ‘old investment’. Thus, when technological development is the engine of growth, creative destruction effects are important and must be taken into account. Two levels of creative destruction may be distinguished. A first level of creative destruction refers to the profits lost by the current producer due to the appearance of a new good. A second level of creative destruction refers to all the profits domestic producers could obtain by successively introducing new goods in the economy and lose when producers with higher productivity in the development of new goods make it unprofitable for them to continue developing new goods. The specification for FDI considered in this paper stresses these creative destruction effects. I consider the case where the lower costs of foreign investors imply that domestic investment becomes unprofitable. So, the results obtained are relevant for foreign investment that crowds-out domestic investment. When the second level creative destruction effect is present foreign investment implies transfers of profits to foreigners that include all the profits nationals would obtain if they kept investing in the development of new goods, but that belong to foreigners when this investment is made by foreigners. This is also a transfer of income to foreigners. I consider the existence of taxes on profits (or on R&D investment), determine the optimal tax for an economy open to foreign investment and compare this with the results for a closed economy. The value of the international interest rate will be shown to be a fundamental determinant of the optimal tax rate in the economy open to foreign investment. As already emphasized by Gordon and Hines (2002), in the economy open to foreign investment, there is access to the international capital market and the international interest rate is not affected by domestic policies, unlike what occurs in a closed economy. The paper considers an economy where growth is due to private investment in R&D. Technological development is formalized as increasing product variety. This specification was chosen instead of the rising product quality, as it clarifies the effects of opening the economy to foreign investment. For the closed economy with increasing product variety it is optimal to subsidize R&D or profits.4 For the rising quality case, the strength of the creative destruction effect implies that the optimal policy may be to tax R&D or profits. So, the choice of the increasing variety specification clarifies the difference between a closed economy and an economy open to FDI. The next section presents the model. Section 3 obtains the optimal tax. Section 4 studies the welfare effect of foreign investment and shows that foreign investment may decrease national welfare even when the tax rate is at its optimal level. The entire analysis is carried out from the perspective of the home economy, which is assumed to be a small economy. It is assumed that there is no trade other than what is implied by foreign investment.5
نتیجه گیری انگلیسی
The opening of the economy to foreign investment decreases the cost of introducing new goods in the economy. Two other linked effects are a transfer of income to foreigners and that the interest rate becomes exogenous. All these effects change welfare and the optimal tax/subsidy on profits or R&D. The decrease in the cost of introducing new goods in the economy and the exogeneity of the interest rate increase the optimal subsidy. The existence of the transfer of income to foreigners decreases the optimal subsidy, and could even imply an optimal tax instead of a subsidy. The final effect depends on the preferences of the agents and on the value of the international interest rate. Regarding the welfare effect of foreign investment, it is shown that foreign investment may decrease national welfare even when the tax rate is at its optimal level. The main benefit from foreign investment is the decrease in the innovation cost. If the productivity advantage of foreign investors is small the benefit is also small and may be dominated by the negative effect of transfers. The model in this paper uses a very simple structure that allows us to obtain analytical solutions. This implies that the results should be read carefully. Nevertheless, this research should be an alert to those economies spending large amounts of resources to attract foreign investors. When the technological advantage of foreign investors is not great enough, there may be no welfare gains from this investment.