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

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1-6 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION 1.4 Study Organization The remainder of study is organized as follows. Chapter 2 summarizes major insights from the literature on determinants of investment and growth, with special attention to the role of taxes and tax incentives. Chapter 3 focuses on the economics of tax incentives by reviewing the advantages and disadvantages of these tools for investment promotion. Chapter 4 discusses some of the main analytical tools for evaluating the economic and financial impact of tax incentives. Chapter 5 examines the advantages and disadvantages of widely used tax incentive instruments, and Chapter 6 reviews the economics of harmful tax competition. Chapter 7, which reviews tax systems and tax incentive programs in the SADC region, completes our analysis. Chapter 8 summarizes our main points and presents recommendations for consideration by the SADC Directorate on Trade, Industry and Finance (TIFI) and SADC member countries. The appendix describes the tax incentive regimes in each SADC member country, drawing on information from the SADC tax database (as of September 2003) and supplementary sources as noted therein.
2. Taxation, Investment, and Growth Although many development practitioners and researchers continue to target capital accumulation as the driving force in economic growth, ‘something else’ besides capital accumulation is critical for understanding differences in economic growth and income across countries. -- Easterly and Levine (2001) … tax incentives do affect the decisions of some investors some of the time. —Morisset and Pirnia (2001) In this chapter we examine two fundamental premises that underlie the justification for offering investment tax incentives in developing countries: first, that additional investment leads to faster economic growth and higher standards of living; and second, that tax breaks stimulate additional investment. These statements may seem self-evident, but both of them are subject to important qualifications that are directly relevant to understanding the effectiveness and impact of investment tax incentives. 2.1 Capital Investment and Economic Growth A standard tool used by economists to study economic growth is an empirical framework called “growth accounting.” Given the rate of population growth, the growth of per capita income is driven by • Investment in physical capital • Investment in human capital, and • Productivity growth. If productivity and the quality of labor were constant then investment in physical capital would directly determine the growth of per capita income. Empirically, however, changes in productivity and investment in human capital are central to the growth process. Virtually every analysis of economic growth highlights the importance of investing in human capital—through education, technical training, preventive and primary health care, and
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6. Economics of Harmful Tax Competi
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TAX SYSTEMS AND INCENTIVES IN THE S
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Table 7-5 Elements of Tax Structure
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8. Conclusions and Recommendations
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CONCLUSIONS AND RECOMMENDATIONS 8-3
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A-2 APPENDIX The present investment
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