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

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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.
CONCLUSIONS AND RECOMMENDATIONS 8-3 POLICY COHERENCE SADC members should agree to review the coherence of their tax incentive programs. One element of coherence is consistency between goals, criteria, and instruments. For example, the goal of promoting growth and development may be served by tax measures that carefully target activities that create substantial positive externalities through modern technology, research and development, and technical training. But this goal is poorly served by policies that support inefficient and uncompetitive activities or seriously distort the allocation of resources. The goal of employment creation may be served by incentives that are designed to stimulate labor-intensive activities, but not by measures that sharply reduce the cost of capital, thereby favoring capital-intensive projects and technologies. Likewise, the goal of bettering the lives of the poor might be served by well designed incentives to stimulate labor- intensive investments, especially in rural areas, but not by programs that award excessive or indiscriminate fiscal benefits to wealthy business interests at the expense of funding for poverty reduction programs. A second element of coherence is consistency between tax policies and other policies to improve the investment climate, including macroeconomic policies, structural reforms, and institutional reforms. Tax incentives should be viewed as one element of an integrated program for promoting productive investment. The analysis of policy coherence should encompass incentives operating through both direct and indirect taxes, including protective tariffs and, in some countries, the remission of import duty on capital goods, raw materials, and intermediate goods. TAX POLICY ANALYSIS SADC member states should mutually agree to develop the analytical capacity, organizational arrangements, and institutional procedures necessary to conduct a professional review of existing and proposed tax incentive measures and other tax policies. The review should address the effectiveness of each measure and its impact on revenue, tax administration, economic efficiency, and equity. This does not require highly sophisticated technical analysis. The purpose of strengthening systems for policy analysis is to ensure that policy decisions are based on full information about their likely impact. Otherwise, tax incentive policies tend to be driven by an overly optimistic vision of benefits and disregard of important costs. REVENUE MANAGEMENT AND THE FINANCE MINISTRY Because revenue mobilization is the central purpose of the tax system, SADC member states should agree in principle that tax incentive programs must be designed to ensure prudent revenue management.
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TECHNICAL REPORT Effectiveness and
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Contents Executive Summary xi 1. In
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Contents (continued) ILLUSTRATIONS
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Glossary ACT additional company tax
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Preface The Scope of Work (SOW) for
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PREFACE IX Export Development & Inv
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XII EFFECTIVENESS AND IMPACT OF TAX
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1. Introduction Why should schemes
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INTRODUCTION 1-3 well administered.
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INTRODUCTION 1-5 from selective to
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2. Taxation, Investment, and Growth
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TAXATION, INVESTMENT, AND GROWTH 2-
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