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

6-12 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
competition is a negative-sum game, which damages development prospects for the region as a
whole.
If tax competition is a negative-sum game, then a well designed agreement to coordinate
incentives can be a win-win arrangement for all Member States. There are two ways this
situation can arise:
•
First, unrestrained tax competition can provoke a “race to the bottom” that impairs
development in every country. This may sound unlikely, but it can easily occur as a
consequence of the prisoner’s dilemma logic, combined with widespread misperception of
the benefits and costs of tax incentives (which feeds the winner’s curse), and political
pressure from interest groups that benefit from the incentives. Just as political dynamics
often create a tendency for approving budget programs with unsustainable deficits, these
common factors create a tendency for jurisdictions to offer tax incentives that harm their
own interests, as well as those of the region. In this case, the mitigation of tax competition
benefits all Member States.
• Second, tax competition may yield winners and losers, even though the net impact is
negative for the region. Some states may benefit from offering generous incentives, while
the fiscal and economic costs of tax competition impair development prospects in other
states. As sovereign states, winners from the status quo will not sacrifice their national
interest for the good of the community at large. In this case, an acceptable agreement would
require hard bargaining over provisions to compensate the winners for accepting measures
to mitigate the tax competition.
It is difficult to distinguish between these two cases in practice due to limited information
about the costs and benefits of most tax incentive regimes. Indeed, it is quite possible that
most countries perceive that they are benefiting from their tax incentive policies, even when
they are not. As discussed in chapter 3, decisions on tax incentive policies are often driven by
an exaggerated view of the benefits and a serious underestimate of the costs. Improved data
systems and solid policy analysis are thus fundamental in achieving more efficient strategies
for investment promotion and an effective regional agreement on tax cooperation.
OPTIONS FOR COOPERATION
Even though a well designed agreement on tax cooperation can be a win-win strategy for all
Member States (compared to the alternative of unrestrained tax competition), reaching an
accord is inherently difficult. The usual starting point is a deep distrust of any measures that
may compromise state sovereignty, and a strong desire by each country to maximize its share
of the benefits. In addition, the same factors that create a tendency for excess tax incentives
also work against achieving a cooperative solution.