Yariv Brauner (Florida) presents Tax Incentives and Economic Development at Florida today as part of its Faculty Enrichment Series. Here is a description of the paper:
The article builds on the insights of economic 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. It analyses the popularity of tax incentives among developing countries despite the strong criticism of academics and powerful international institutions. 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.
The article begins with a brief note of what developing countries actually do: the type of tax incentives used by developing countries eyeing foreign direct investment. Next, it explores why they pursue this policy. The rhetoric is powerful in practice, yet is challenged by both theoretical and empirical research. Consensus has not been reached on most of the relevant points, yet what we do know can assist progress. We can use it to redirect the use of tax incentives to avenues that will allow them a chance of success.
Progress, however, cannot happen without the support of developed countries, where investors reside. Their role is examined next, based on a working assumption that they are interested in the development of developing countries. The discussion begins with the most straightforward aspect of the role of developed countries: making sure that the benefits granted by developing countries do not end up in the treasury of developed countries. The most discussed measure to achieve that result is the controversial tax sparing provision. Currently, this provision is used mainly as a statement that developed countries do “something.” Tax sparing, however, is just one measure (presumably not the most important among a variety of measures) that developed countries may pursue to assist developing countries on a path toward to development. The various measures are explored together with their limitations, and the necessary conditions for their effectiveness. Finally, lessons from the extensive practice and study of the non-tax aspects of foreign aid are drawn.
The article concludes with a realistic program for further research and action. It emphasizes the critical role of international cooperation and coordination of tax policies, without which this whole project is probably futile. In particular, it demonstrates some of the possibilities presented by a more educated use of tax incentives, and elaborates on the conditions that may be required, if redirected tax incentives’ programs are to be given a chance to succeed.
