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

More documents

Recommendations

Info

2-2 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION improved nutrition—to augment labor productivity. Broad-based human capital investment is also essential for poverty reduction because it directly enhances capabilities and opportunities for the poor. The productivity effect is often referred to as technical change. In fact it refers to any source of overall efficiency enhancement. A better label is total factor productivity (TFP) growth, which measures the difference between actual output growth and that which would be explained by increases in factor inputs (capital and labor) alone. In addition to technology, TFP growth also stems from structural changes that shift resources to more productive sectors, the elimination of impediments to competitive markets, stronger financial markets, and improved management techniques. Recent models of economic growth focus on the sources of productivity growth. These theories emphasize determinants such as knowledge externalities, economies of scale in production, and a “catch-up” effect. Knowledge externalities arise when knowledge-building activities not only enhance productivity for the immediate production unit, but also create diffuse, lasting, and cumulative efficiency benefits for the economy. When these spill-over effects are significant, private decision makers will systematically under invest in knowledge-building activities because investors have no incentive to take into account the gains that accrue to others. In effect, advances in knowledge are a type of public good. This provides a justification for cost- effective interventions to strengthen the incentives for knowledge-generating activities such as investments in science and technology, education and training, capital investment to upgrade production facilities, or foreign direct investment involving technology transfer. The importance of scale economies has been understood for centuries, but only recently has it been incorporated into formal growth theory. For many (though not all) production processes, a larger scale yields lower unit costs, higher productivity, and greater competitiveness. This is an important reason for pursuing outward-looking strategies, particularly in low-income countries where the domestic market is very small compared to vast opportunities in regional and global market. Finally, the catch-up effect suggests that poor countries ought to have the best prospects for rapid growth. This is ironic because most poor countries have not achieved rapid growth. (Otherwise they would no longer be poor!). The basis for the idea is that poor countries can benefit from a deep pool of existing knowledge. They can also supplement domestic resources with foreign capital and know-how, and take advantage of large global markets. Statistical evidence strongly confirms the validity of the idea, and reveals that poor growth performance in poor countries stems largely from policies and institutions that inhibit investment and undermine productivity. With appropriate and consistent policies and institutions, poor
TAXATION, INVESTMENT, AND GROWTH 2-3 countries should be in a position to achieve high rates of growth— as evidenced by more than a few remarkable success stories over the past 40 years. 11 The immediate implication is that a successful growth strategy must be seriously concerned with the impact of policies on productivity, innovation, and knowledge acquisition. Investment in physical capital is one determinant of economic growth, but not the most important one. This is why Easterly and Levine, in the passage quoted at the beginning of this chapter, emphasize that “something else” beyond capital accumulation accounts for most of the differences in economic growth across countries. Similarly, Michael Porter’s influential theory of competitiveness highlights the importance of productivity. According to Porter, policies fostering investments that depend on continued subsidies or protection are “simply inappropriate… no matter what the stage of development of a nation’s industry.” (Porter 1998, 674.) Even more sharply, Devarajan, Easterly and Pack (2002) provide evidence showing that “investment is not the constraint on African development.” Their empirical analysis indicates that low growth rates in Africa are primarily due to low and declining productivity resulting from policies that foster and sustain inefficient production activities. In short, neglect of the productivity component in the growth equation can totally undermine the benefit of higher investment and impair the quest for prosperity. 12 Exhibit 2-1 outlines policies that help foster productivity. One of them is the use of tax incentives to encourage efficient investment, training, and research and development. The impact of investment tax incentives on efficiency will be examined in more detail in the following chapter. But first let us examine in general terms the influence of tax policy on investment decisions. 2.2 Theory of the Determinants of Investment RISK AND RETURN The driving force behind private investment can be conceptualized in terms of risk and return. Investment projects are viable when the expected rate of return on capital exceeds a threshold (hurdle) rate that reflects the cost of capital plus a premium to compensate for perceived risk. If two mutually exclusive alternatives are both viable—for example, two 11 Examples include Korea, Taiwan, Malaysia, Indonesia, China, Botswana, Mauritius, Chile, and more recently, Vietnam and India. All of these countries have achieved sustained periods of growth and poverty reduction at rates far higher than today’s rich countries experienced historically. 12 Moran (1998) found that nearly half of the FDI projects that he examined in 30 countries had net negative effects on host-country welfare. Pigato (2000) reviews several such studies and concludes that negative effects of FDI arise mainly from “lack of competitiveness of input and output markets in the host country, and from distortions in the domestic incentive framework.”
Page 1: TECHNICAL REPORT Effectiveness and
Page 5 and 6: Contents Executive Summary xi 1. In
Page 7 and 8: Contents (continued) ILLUSTRATIONS
Page 9 and 10: Glossary ACT additional company tax
Page 11 and 12: Preface The Scope of Work (SOW) for
Page 13: PREFACE IX Export Development & Inv
Page 16 and 17: XII EFFECTIVENESS AND IMPACT OF TAX
Page 18 and 19: XIV EFFECTIVENESS AND IMPACT OF TAX
Page 20 and 21: XVI EFFECTIVENESS AND IMPACT OF TAX
Page 22 and 23: XVIII EFFECTIVENESS AND IMPACT OF T
Page 25 and 26: 1. Introduction Why should schemes
Page 27 and 28: INTRODUCTION 1-3 well administered.
Page 29 and 30: INTRODUCTION 1-5 from selective to
Page 31: 2. Taxation, Investment, and Growth
Page 35 and 36: TAXATION, INVESTMENT, AND GROWTH 2-
Page 43: TAXATION, INVESTMENT, AND GROWTH 2-
Page 46 and 47: 3-2 EFFECTIVENESS AND IMPACT OF TAX
Page 54 and 55: 3-10 EFFECTIVENESS AND IMPACT OF TA
Page 82 and 83:
5-4 EFFECTIVENESS AND IMPACT OF TAX
Page 84 and 85:
Page 86 and 87:
Page 88 and 89:
5-10 EFFECTIVENESS AND IMPACT OF TA
Page 90 and 91:
Page 92 and 93:
Page 95 and 96:
6. Economics of Harmful Tax Competi
Page 97 and 98:
ECONOMICS OF HARMFUL TAX COMPETITIO
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
7. Tax Systems and Tax Incentives i
Page 111 and 112:
TAX SYSTEMS AND INCENTIVES IN THE S
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Table 7-5 Elements of Tax Structure
Page 133 and 134:
Table 7-5 (continued) Sheet 3 of 4
Page 135 and 136:
Notes a Mozambique information Coun
Page 137 and 138:
8. Conclusions and Recommendations
Page 139 and 140:
CONCLUSIONS AND RECOMMENDATIONS 8-3
Page 141 and 142:
Page 143 and 144:
Page 145:
Page 148 and 149:
R-2 EFFECTIVENESS AND IMPACT OF TAX
Page 150 and 151:
Page 152 and 153:
Page 154 and 155:
A-2 APPENDIX The present investment
Page 156 and 157:
A-4 APPENDIX Democratic Republic of
Page 158 and 159:
A-6 APPENDIX Government revenue in
Page 160 and 161:
A-8 APPENDIX income tax payable by
Page 162 and 163:
A-10 APPENDIX (though they are obli
Page 164 and 165:
A-12 APPENDIX • • • Asset All
Page 166 and 167:
A-14 APPENDIX also get zero import
Page 168 and 169:
A-16 APPENDIX EPZ measure was motiv
show all

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

Create successful ePaper yourself

Delete template?

Save as template?