Document Type

Article

Publication Date

2010

Abstract

This article builds on the insights of this development research to develop a new agenda for tax incentives (and equivalent tax measures), the research of their merits when used by developing countries, and their optimal design. The stated goal of these incentives is to attract foreign direct investment, and ultimately enhance economic growth and promote development. Almost all countries use such tax incentives, and business interests strongly support and even demand their use, yet, economic research in general, and the international economic organizations in particular, have been skeptical about their effectiveness." Tax incentives are not only ubiquitous, but also very similar in their general structure and design, if not in the actual details, due mainly to tax competition. Another political aspect of this problem is that government officials often believe or at least project confidence that they are able to pick the "right horses," so even if, on average, tax incentives are not effective, the incentives that they grant will be. For some, this fantasy justifies their jobs and promotions. An obvious result (and observation) is that tax incentives are not tailored to the very different needs of different countries, and are not flexible and adaptive to changes in circumstances. This article analyzes this phenomenon beyond simple criticism of its failures in an attempt to better understand the forces that generated it. The article then proceeds to explore realistic avenues of advancement and the necessary conditions for such advancement. The primary contributions of this article are: the mapping of the gaps in the research of tax incentives (assuming that their stated goal is the true rationale for their use), the demonstration of the role of developed countries in the process of development, and the highlighting of international tax cooperation and coordination of tax policies as a condition for effective progress.

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