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

1-2 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
The lack of consensus can be attributed in part to the technical difficulties involved in
measuring the benefits and costs of tax incentives, especially without hard data on the actual
performance of investments receiving fiscal benefits. Equally important, the effect of tax
incentives depends on the circumstances. The challenge is to understand the conditions and the
policy design features that determine whether tax incentives are likely to deliver substantial and
sustainable net benefits in a particular country.
The purpose of the present study, then, is to help tax officials, policymakers, and other
stakeholders in the SADC region meet this challenge by explaining the lessons learned from
the latest theories and empirical studies about tax incentives and their implications for the
SADC region. 3
1.1 Starting Point—Principles of Taxation for Developing
Countries 4
The fundamental purpose of taxation is to mobilize revenue to finance the provision of public
goods and services through the government budget. Therefore, the core principle of taxation is
that the tax system should be an effective instrument for raising revenue. While fulfilling the
revenue function, taxes also have a pervasive influence on economic decisions of individuals
and businesses, and on social equity. Hence, the tax system should be structured to achieve
the appropriate level of revenue as efficiently and fairly as possible. In short, a well designed
tax system should be
• Effective in raising revenue;
• Efficient in its effect on resource allocation decisions of households and businesses; and
• Equitable in its impact on different groups in society. 5
EFFECTIVENESS
An effective tax system is one that satisfies revenue requirements, given the desired scope and
size of government and the availability of non-tax financing. In dynamic terms, an effective
tax system should be elastic, in the sense that revenue rises naturally with GDP without
requiring frequent ad hoc measures. An effective tax system must be consistent with a
country’s administrative capacity. Even the best tax code can produce poor results if it is not
3 Especially recommended resources include Zee, Stotsky and Ley (2002); OECD (2001); Shome (1995); Shah
(1995), Bird & Oldman (1990).
4 World Bank (1988), chapter 4; World Bank (1991); Bird (1992). For a more recent review of basic tax policy
issues, see Tanzi and Zee (2000).
5 Another basic principle, though less often cited, is predictability. A tax system that is prone to unexpected
changes or arbitrary administration can be a major risk factor for investors. However, tax incentive programs
frequently include a guarantee that prior recipients will not suffer a loss of tax benefits when the programs
are changed—as they often are.