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

3-16 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
elsewhere in the economy. Furthermore, most tax incentives draw resources toward capital-
intensive investments, which have a high (often very high) cost per job created. Alternative
policy tools that avoid this bias can create far more jobs at less cost.
Tax incentives rarely make a substantial contribution to solving a country’s employment
problem. In Malawi, for example, the labor force of 5 million is expanding by 2 percent per
year. Just to break even the economy has to provide opportunities for 100,000 additional
workers per year. In Tanzania, the labor force of 18 million is expanding at about the same
rate, bringing in 360,000 new workers per year. 40 Job creation on this scale requires policies
and programs that have a much broader impact. Most tax incentive programs hardly make a
dent in the problem.
7. Lack of Transparency. The fiscal cost of a tax break is much less visible than the cost of
alternative investment promotion policies that involve actual budget outlays. In addition, the
actual economic costs associated with tax incentives are indirect and difficult to monitor.
These features may be convenient for short-term political purposes, but they are undesirable
features of public policy in an era where good governance, accountability, and fiscal
transparency are in demand. When costs are hidden, it is easy for governments to pursue
measures that are not cost-effective, and not consistent with the stated development goals.
8. Political Dynamics. Tax incentives are a form of subsidy. They have a direct cash value to
recipients, often involving large amounts of money. Consequently, companies and business
groups have strong motivation to lobby for tax incentives and to exaggerate the prospective
economic benefits. If incentives are provided to selected industries or regions, businesses and
politicians representing other industries and regions use these precedents as arguments for
pressuring government to broaden the programs and to interpret the eligibility rules liberally.
This pressure often leads to a proliferation of tax breaks, which riddle the tax net with holes,
multiply the fiscal and economic costs, and undermine the coherence of tax policy. 41 And
once businesses begin to benefit from special incentives, pressure to perpetuate the programs
becomes inevitable. 42 The cash value of tax incentives is also an open inducement to bribery
and corruption. These abuses are particularly likely where approvals are discretionary,
criteria are vague, agreements are confidential, and mechanisms are lacking to track and
control the direct and indirect fiscal costs. The lobbying activities themselves represent a loss
of economic efficiency, as companies devote resources to seeking profit through political
influence rather than through higher productivity and product quality.
9. There Are Other Instruments. Using tax incentives to compensate for deficiencies in other
aspects of the investment climate is attractive on the surface. But one of the main conclusions
40 World Bank, World Development Indicators online.
41 Gillis (1989) documents an extreme case of tax-incentive proliferation in Indonesia prior to the 1984 tax
reforms.
42 Porter (1998, 665) refers to the idea of “temporary” subsidies or protection is an oxymoron, because “it
becomes an addictive drug” that creates a strong political dynamic to preserve the benefits.