The authors provide an empirical framework for assessing the effects of tax policy on an array of producer decisions about output supplies and input demands in Mexico, Pakistan, and Turkey. They specify and estimate a dynamic production structure model with imperfect competition for selected industries in these countries. The model results suggest that tax policy affected production and investment and further that selective tax incentives such as investment tax credits, investment allowances, and accelerated capital consumption (depreciation) allowances are more cost effective at promoting investment than more general tax incentives such as corporate tax rate reductions. The long run cost effectiveness of these incentives - except corporate tax rate reductions, which proved cost ineffective in all cases - varies by country. In Turkey, investment allowances and capital consumption allowances were cost effective. In Mexico, neither investment tax credits nor accelerated capital consumption allowances were cost effective. In contrast, in Pakistan, both investment tax credits and accelerated capital consumption allowances were cost effective. In the intermediate run, defined as tax policy impact after one year, only the investment allowances and accelerated capital consumption allowances available to Turkish industries proved cost effective. To make selective tax incentives more effective, investmenttax credits must be refundable and carrying forward investment depreciation allowances must be permitted. If stimulating investment expenditure is the sole objective of tax policy, reducing the corporate tax rate is not a cost effective instrument to achieve this objective.
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