Optimal Pollution and Foreign-Investment Taxes in a Small Open Economy

Posted: 16 Jun 1998

See all articles by Chi-Chur Chao

Chi-Chur Chao

Deakin University; Chinese University of Hong Kong - Department of Economics; Financial Research Network (FIRN)

Eden S. H. Yu

City University of Hong Kong - Department of Economics & Finance; Chu Hai College of Higher Education

Abstract

This paper examines pollution and foreign-capital tax policies on the host country?s welfare when foreign-investment tax credits are absent or present in the source country. In the absence of tax credits, the optimal policy is a pollution tax with a foreign-investment tax or subsidy. The presence of tax credits may, however, result in a higher investment tax but lower pollution tax, leading to higher welfare but lower environmental quality in the host country. The source-country?s tax credits may cause a switch in the host-country?s capital subsidy to a tax, which may improve the environment.

JEL Classification: H21, Q28, Q38

Suggested Citation

Chao, Chi-Chur and Yu, Eden S. H., Optimal Pollution and Foreign-Investment Taxes in a Small Open Economy. Available at SSRN: https://ssrn.com/abstract=96748

Chi-Chur Chao

Deakin University ( email )

Chinese University of Hong Kong - Department of Economics

Shatin, N.T.
Hong Kong
852 2603 5805 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Eden S. H. Yu (Contact Author)

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Chu Hai College of Higher Education ( email )

Yi Lok Street Rivera Gardens
Tsuen Wan
Hong Kong

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