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

1. Introduction
Why should schemes whose impact is either slight or unknown be so widespread and popular
in developing countries?-- Shah and Toye (1978)
The use of tax incentives is widespread even though the available empirical evidence on the
cost effectiveness of such incentives in stimulating investment is highly inconclusive.-- Zee,
Stotsky and Ley (2002)
These passages come from two major papers on tax incentives in developing countries,
written a quarter century apart. They show that the use of tax incentives to stimulate
investment has long been very popular and very controversial. The passages, however, differ
in one important respect. The first paper found no evidence that tax incentives actually
stimulate investment, whereas the second questions the cost-effectiveness of such incentives.
This difference reflects the fact that research conducted during the intervening 25 years has
demonstrated that tax incentives can indeed stimulate investment under some circumstances.
Yet the balance between benefits and costs remains very much a matter for debate.
This debate echoes throughout the SADC region. Even among well-informed officials,
opinions cover the spectrum from outright opposition to strong support. Some believe that
tax incentives rarely matter in attracting viable long-term investments, and that the associated
distortions and abuses swamp whatever positive response may occur. Others contend with
equal conviction that tax incentives can work and are essential in attracting investment,
promoting growth, and creating jobs.
In fact, every SADC country offers tax incentives. Indeed, many governments in the region
face pressure to sweeten their incentive programs to compete with tax breaks offered
elsewhere in the region and in other parts of the world. Yet they are also under great pressure
to strengthen the domestic revenue systems in order to provide adequate and sustainable
funding for essential public goods and services. In response to these influences, some SADC
governments have recently introduced new tax incentives while others have scaled back their
incentive programs. For example, South Africa and Lesotho eliminated tax holidays while
Zambia recently introduced new tax exemptions for companies designated as export
processing zones. In short, the appropriate use of incentive policies remains elusive.