Dynamic inconsistency and preferential taxation of foreign capital

Abstract

In a two-period dynamic model in which a single country attempts to attract two large investors endowed with capital with varying rate of returns, we show that the result of Kishore and Roy (Econ Lett 124:88–92, 2014) that a country has incentives to commit to a non-preferential regime to circumvent a dynamic inconsistency problem does not hold. The tax revenue of the government may be higher under a preferential regime compared to a non-preferential regime.