Effectiveness and Economic Impact of Tax Incentives in the SADC ...

6-8 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
economy from “winning” the project may be small or even negative. The tendency to give
away the kitchen sink is especially pronounced if policymakers have an exaggerated idea of
the benefits and a limited understanding of the costs of tax incentives. Moreover, there are
strong political pressures to win projects even when the cost is excessively high, particularly if
the adverse effects are hidden or deferred.
There is no shortage of evidence that inter-jurisdictional competition for investment often
leads to outcomes of dubious value to the “winner.” For example, UNCTAD (2002, 205) lists
over a dozen international showcase projects that leveraged fiscal competition to obtain
enormous incentive packages. The incentives alone are estimated to have cost more than
$340,000 per job created in a Mercedes plant in Brazil, and $420,000 per job in a Ford plant in
India. Closer to home, the Ramatex textile factory sought concessions from several countries
in the SADC region before accepting a very generous package of incentives from Namibia. 85
Even within Namibia questions have been raised about the value of the project to the country
that won the competition (see Exhibit 6-2).
The main point of this theoretical excursion is that cooperation to stem HTC can serve the
interests of the countries that are asked to “concede” to reductions in fiscal incentives as part
of a regional tax agreement, as well as the countries that feel “prejudiced” by tax breaks given
elsewhere. This observation can be the fulcrum for negotiating a cooperative agreement
within SADC.
6.3 Can Jurisdictions Cooperate in Mitigating Harmful Tax
Competition?
Tax competition is here to stay as a feature of the international economy. Sovereign
jurisdictions inevitably make different political decisions about the level and structure of
taxes. The resulting tax differentials inherently create competition for internationally mobile
capital (and labor). Tax competition can be a healthy inducement for improving efficiency in
revenue systems throughout the world and expanding global investment. But this
competition also generates harmful fiscal externalities from capital migration. Uncoordinated
tax competition (the “race to the bottom”) also creates strategic choice problems that diminish
fiscal resources in poor countries and rich countries alike.
Experience in many parts of the world suggests that it is very difficult to develop effective
cooperative approaches among sovereign jurisdictions to mitigate the harmful effects of tax
competition. Within the United States, for example, there has long been concern about the cost
85 Not enough data is available to compute the cost of incentives per job created in this case, but from the
information given in Exhibit 6.2, the subsidy for site preparation alone amounted to $20,000 per job created as
of April 2003.