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Tax incentives: protecting the tax baseBank 6 have produced useful reports that provide guidance topolicymakers on whether to adopt tax incentives and how best todesign them. The empirical evidence on the cost-effectiveness ofusing tax incentives to increase investment is inconclusive. Whileeconomists have made significant advances in determining the correlationbetween increased tax incentives and increased investment,it is challenging to determine whether tax incentives caused the additionalinvestments. This is partly because it is difficult to determinethe amount of marginal investment associated with the tax benefit— that is to say, the investments that would not otherwise haveoccurred “but for” the tax benefits. While foreign investors oftenclaim that tax incentives were necessary for the investment decision,it is not easy to determine the validity of the claim. Governmentsoften adopt tax incentives in a package with other reforms designedto improve the climate for investment, making it difficult to determinethe portion of new investment that is attributable to tax benefitsand the portion that relates to other pro-investor reforms. Withthese qualifications, it is sometimes easy to conclude that a particulartax incentive scheme has resulted in little new investment, witha substantial cost to the government. In other cases, however, taxincentives have clearly played an important role in attracting newinvestment that contributed to substantial increases in growth anddevelopment.One place to start thinking about tax incentives is to considerwhat role governments should play in encouraging growth and development.Governments have many social and economic objectives anda variety of tools to achieve those objectives. 7 Tax policy is just one6See, for example, Robin W. Broadway and Anwar Shah, “Perspectiveson the Role of Investment Incentives in Developing Countries,” World Bank(Washington, D.C.: World Bank, 1992); Sebastian James, “Effectiveness ofTax and Non-Tax Incentives and Investments: Evidence and Policy Implications,”World Bank Group (Washington, D.C.: WBG, 2013); Sebastian James,“Incentives and Investments: Evidence and Policy Implications,” World BankGroup (Washington, D.C.: WBG, 2009); Alex Easson and Eric M. Zolt, “TaxIncentives,” supra note 2.7See, generally, Richard M. Bird and Eric M. Zolt, “Tax Policy in EmergingCountries,” (2008) Vol. 26, Environment and Planning C: Governmentand Policy, 73-86; Richard M. Bird, “Tax Incentives for Investment in Devel-453