Evaluating the Costs and Benefits of Corporate Tax Incentives

Abstract

Developing countries are increasingly offering tax breaks to attract investors and pursue various policy objectives such as encouraging investments in research and development (R and D) and increasing exports. Such incentives, however, can be very costly to governments. Too often, developing countries - already struggling with revenue mobilization - adopt investment incentives in an ad hoc manner, without analyzing the value for money of these instruments. Cost-benefit analysis can help policy makers demonstrate the direct cost (tax revenue foregone) incurred by governments against the economic benefits being pursued. Global evidence on investment location decisions suggests that while tax incentives can help attract investment, other factors, such as the wider investment climate and market opportunities, matter most. Tax incentives should therefore be conceived as part of a country’s broader investment policy framework and governments should be realistic about the potential impact any measure may have. In this light, cost-benefit analysis can serve as a powerful tool to inform incentives policy reform and offer important inputs into a country’s investment policy strategy.