Dokuz Eylul University , Faculty of Business ECO 4113 FISCAL ECONOMICS Prof . Yeşim KUŞTEPELİ

1. Dokuz EylulUniversity, Faculty of Business ECO 4113 FISCAL ECONOMICS Prof. Yeşim KUŞTEPELİ 12.12.2012 ‘’ The Effects of taxes on investment ‘’ Gizem Berghan , Cansu Yetek , Cenk M. Çakmak

2. Framework; • FDI and Taxation • Taxes and Entrepreneur’s Investment • Effects of Tax Incentives on Investment • Types of Tax Incentives

3. Abstract • Taxes affect investments with many different dimensions which are savings, consumptions and private sector’s investments. • Taxes are decreasing savings with dropping funds which are readiness to investment.

4. INTRODUCTION • How sensitive is foreign direct investment (FDI) to taxation? • How does tax planning factor in? • What are the effects of taxes on entrepreneurs? • What are the tax incentives’ effect on investment?

5. TaxMeasuresWhichEffectInvestmentDecisions; • • Income & corporation tax • • Investment reduction • • Amortization methods and rates • • Taxes of increasing values • • Nondistributed corporation tax • • Taxation of partnership's gain • • Customs Union • • Expenditure taxes

6. Taxpolicy has threeelements; • Firstly, tax policy increases competition power of individual and bussinesses, so foreign direct investment will increase. • Secondly, investors want to choose a suitable tax policy for their portfolio. • Thirdly, tax incentives supplies many tax advantages for countries, tax incentives are in all countries system.

7. FDI andTaxation • Foreign direct investment had started from colonialism period and all countries give an importance these investments nowadays, because investment is a kind of capital and all countries purpose to finance their deficits with foreign direct investment like education deficit, tax deficit, balance of payment deficit.

8. FDI andTaxation • Allgovernmentsarekeentoattractforeigndirectinvestment (FDI). Because, it can generatenewjobs, bring in newtechnologiesand, moregenerally, promotegrowthandemployment.

9. FDI andTaxation • Tax policies may also support direct investment abroad, as outbound investment may provide efficient access to foreign markets and production scale economies, leading to increased net domestic income.

10. Howsensitive FDI totaxation? • Foreigndirectinvestmentsuppliesknow-how transfer, technology transfer andeceonomicgrowthforallcountries. • Forexample; FDI decreasesby 3.7% following a 1% increase in thetax rate on FDI. • Recentanalysissupportstheviewthatthesensitivity of FDI totaxdepends on thehostcountryandthemobility of businessactivitiesunderlyingthetaxbase.

11. Howdoestaxplanningfactor in? • FDI ignore tax-planning strategies used by investors to lower their tax burden. • tax planning can significantly reduce the tax burden on FDI.

12. TAXES AND ENTREPRENEUR’S INVESTMENT • Taxation of individuals who are self-employed can affect levels of entrepreneurship in a number of ways. • For instance, self-employed individuals who are involved in starting businesses are subject to personal income tax while their reinvested earnings in the firm could be subject to capital gains tax at the disposition of their assets.

13. Effectivecorporatetaxrateshave a largeandsignificantadverseeffect on corporateinvestmentandentrepreneurship. • Thiseffect is robustifwecontrolforothertaxrates,includingpersonalincometaxesandthe VAT andsalestax, formeasures of administrativeburdens, taxcompliance, propertyrightsprotection, regulations, economicdevelopment, opennesstoforeigntrade, seignorage, andinflation.

14. Taxation of Entrepreneurship • 1.Estate and inheritance taxes • 2. Taxes on capital gains • 3. Taxes on entrepreneurial capital

15. Taxes can affectthechoicebetweenbecoming an entrepreneurandremaining in employment. This can happen in twoways: 1.The tax system undermines the key means by which new businesses are financed. • 2. The high rewards that justify the risks associated with becoming an entrepreneur.

16. Negativeeffects on entrepreneurs • Higher tax rates discourage economic growth and job creation by reducing business owners’ incentives to expand their businesses • Higher marginal tax rates lower incentives by reducing profits, but also increase tax avoidance creating a mixed impact on self-employment.

17. Inaddition, businessesthathavethepotentialtogeneratewealthandjobsthroughrapidgrowthoftenneedexternalcapital. Much of thismoneycomesfrominformalinvestors – friends, family, andbusinessangels. • Unequalcorporateandindividualincometaxes can createdistortions • The U.S. has thesecond-higheststatutorycorporatetax rate amongdevelopednations. Highcorporatetaxesdeterforeigninvestment, and in theorylowersthevaluation of U.S. basedcompanies.

18. Effect of taxincentives on investment • Tax incentives are any kind of deductions, exclusions or exemptions from a tax liability offered as an enticement to engage in a specified activity for a certain payment. • Governments can quickly and easily change the range and extent of the tax incentives they offer to attract foreign investors or encourage domestic investment.

19. Effect of taxincentives on investment Optimum balance is point A without tax and then tax is applied about "t", so investment goes from I* to Io and balance occurs in point B , if we want to go back point A, taxes must be decreased. Thisgraphshowsthat; taxincentivesincreaseinvestments.

20. Types of taxincentives • Reducedcorporateincometax rate • Losscarryforwards • Taxholidays • Investmentallowances • Investmenttaxcredits • Reducedtaxes on dividendsandinterestpaidabroad • Deductionsforqualifyingexpenses • Zeroorreducedtariffs • Employment-baseddeductions

21. CONCLUSION • In general, taxes affect investments with many different dimensions which are savings, consumptions and private sector’s investments. • Taxes modify distribution of savings which are used in investment, so it gives rise to effect investment capacity.

22. Investments supply many conveniences for countries which are know-how transfer, technology transfer, increasing production capacity, increasing exports. • In general, countries’ tax policy covers these things; • Financing of economic development • Equity in income distribution • Economic efficieny • Economic stability

23. In addition to these concepts countries make some arrangements on their tax policy like investment allowance, tax credit, tax holidays, tax incentives and tax cuts. • Investment returns a profit for countries and if they want to have a profit maximization, it occurs with decreasing tax burden. Therefore, ifonecountry'staxpoliciesareapplicableandrational, investmentwill as muchpossiblefor a country.

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