A test of relative efficacy of tax expenditures and direct expenditures - A neo-classical approach

This paper uses neo-classical investment theory and time series data for Pa kistan's Manufacturing Sector to test the relative efficacy of tax expendit ure and direct expenditure to boost private non-residential investment. The result shows that the tax policy through cost of capital and expenditure p olicy through public investment are important determinants of private inves tment. It is argued that although both tax and expenditure policies are suc cessful, the tax expenditure (depreciation allowances) is more effective th an direct expenditure. This paper also argues that the economic estimates o f tax expenditure are very high implying that most of the benefits of tax e xpenditure go to those investors who would have invested even in the absenc e of these concessions. (C) 2001 Elsevier Science B.V. All rights reserved.