Why Tax Incentives may be an ineffective tool to encouraging Investment? The role of Investment Climate

Stefan Van Parys,* Sebastian James Abstract: In this paper we first analyze theoretically how the investment climate affects the impact of the corporate tax rate on investment. We do so in a model where the tax revenues are used to improve the investment climate. We find that if the investment climate is very effective at enhancing the productivity of capital, capital can react positively to a rise of the tax…