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Evaluating the Relative Impact of Fiscal Incentives and Trade Policies on the Returns to Manufacturing in Taiwan, 1955–1995

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In the present paper, an integrated cash flow model is developed to examine the relative impact of tax incentives, financial subsidies, and macroeconomic variables on the profitability of industrial investments. It allows for the variables in the model to interact with each other. An application of the model is carried out for Taiwan, which has implemented a variety of fiscal incentives over the past 40 years. The principal policy conclusion is that trade and macroeconomic policies are much more important than income tax incentives or subsidized finance policies in determining the success of Taiwan's industrialization process. The effects of all of the fiscal incentives are found to be much smaller than those of the trade policies or the fundamental trends in macroeconomic variables such as the movement of the real exchange rate and the real wage rate.
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Keywords: F13; H25; O12; Taiwan; export promotion; industrialization; real exchange rate; tax incentives; trade policy

Document Type: Research Article

Affiliations: 1: Department of Economics, Queen's University, 94 University Avenue, Kingston, Ontario K7L 3N6, Canada, and Department of Economics, Eastern Mediterranean University, North Cyprus 2: Department of Economics, Queen's University, Kingston, Ontario K7L 3N6, Canada

Publication date: March 1, 2007

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