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

8-2 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
2. The effect of incentives on productivity and efficiency is at least as important as the
effect on the amount of investment. Productivity growth accounts for much of the
difference in economic growth performance across countries. Modern theories of
competitiveness emphasize the importance of policies in fostering productivity growth.
Hence, productivity effects should be a central concern in any assessment of tax incentive
policies.
3. Investment tax incentives work well in some countries and poorly in others. The
effectiveness and impact of any package of incentives depends on local economic and
fiscal conditions, characteristics of the incoming investment projects, details of the tax
code, and political judgments about tradeoffs among competing policy objectives. Thus,
decisions about tax incentives must be country-specific.
4. The benefits of investment tax incentives are widely exaggerated, while the costs are
widely underestimated. This bias arises partly from weaknesses in tax policy analysis,
and partly from political pressures that inherently favor special interests. By implication,
it is advisable to err on the side of caution in establishing tax incentive policies, so as to
avoid the risk of revenue losses and economic distortions. This is especially so in
countries with stringent revenue constraints and problems with tax administration.
5. Capacity building to strengthen tax policy analysis is a central priority. Every SADC
country can benefit from developing stronger capacity to analyze the effectiveness and
impact of investment tax incentive programs.
Given that the effectiveness and impact of any program depends on country-specific
judgments and conditions, no single system of tax incentives can suit all SADC members.
Nonetheless, our analysis suggests numerous principles and actions that SADC members may
pursue jointly or individually in order to coordinate and improve their tax incentive policies.
The rest of this chapter outlines the recommends.
8.1 General Principles for Agreement
DEFINITION OF TAX INCENTIVES
The SADC Memorandum of Understanding on Co-operation in Taxation and Related Matters
should adopt a definition of “tax incentives” that recognizes both general and selective
incentives. The definition should continue to encompass both direct and indirect tax
measures.