Taxing mobile capital in free trade zones to the detriment of workers*

Abstract

Many countries have exempted the income of firms operating in their free trade or export processing zones from corporate income taxation. This paper examines the long-term economic effects of removing this exemption in the Dominican Republic. The results suggest that removal of the corporate income tax exemption could inflict a burden on relatively low-waged workers of about ten times the amount of additional tax revenue collected. The analysis also measures the consequential impacts on prices of goods and services in the economy. It indicates that wealthier groups in society will gain substantially in real income.