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

8. Conclusions and
Recommendations
We opened this study with a question about investment tax incentives from 25 years ago:
“Why should schemes whose impact is either slight or unknown be so widespread and
popular in developing countries?” This question is just as relevant today because
international experience with tax incentives remains decidedly mixed. Some countries, such
as Mauritius and Malaysia, have used incentives effectively in conjunction with other policies
to stimulate efficient investment, rapid growth, and structural transformation. Many others,
including several SADC countries, have offered generous tax incentives with little to show for
it in employment, growth, and productivity. Still other countries, such as Uganda and
Indonesia, have ended special tax incentives in favor of improving the basic tax system
without diminishing investment or growth. Furthermore, even in some of the success cases,
tax incentives have been associated with revenue loss, fiscal imbalance, economic inefficiency,
abusive tax avoidance schemes, and pressure from interest groups seeking to benefit at the
expense of the treasury.
The objective of this study has been to (1) review the use of tax incentive policies in the SADC
region and (2) provide officials and stakeholders in the region with a balanced explanation of
the issues so they may better understand the conditions under which tax incentive programs
are likely to succeed or fail. We have examined the basic economics of investment tax
incentives; some of the tools used in economic policy analysis; the advantages and
disadvantages of alternative tax instruments for stimulating investment; and the problem of
harmful tax competition. In doing so, we have drawn widely on theoretical and empirical
literature about determinants of investment, the economics of taxation, and lessons from
international and regional experience. Our general conclusions are as follows:
1. Non-tax factors are far more important than tax incentives in determining the level and
quality of investment flows. Non-tax factors include the stability of the political system,
the macroeconomic policy environment, the skills of the labor force, the condition of the
infrastructure, the legal and judicial framework, and the efficiency of the banking system.