The Advantages And Disadvantages Of Tax Incentives

Introduction

Tax incentive is defined as a part of a tax code provided a more favorable tax treatment for particular taxpayers or activities. The purpose of tax incentives is to encourage a certain economic activity. A general tax reduction is not considered as a tax incentive because it does not affect a certain sector (Klemm, 2009). Normally, tax incentives aims to develop the economy through encourage investment in some certain zones like backward regions. It helps to create jobs, to promote industries and to take advantage of technology transfer. In addition, government uses tax incentives to achieve social objectives such as environmental protection and R&D promotion (Batchelder, Goldberg & Orszag, 2006).

The targets of tax incentive may be corporations or individuals. Government uses many types of tax incentives which depend on the target of tax incentive program. For example, to encourage investment in a less-developed region, government can choose between foreign investment and domestic investment. Providing tax incentives for foreign investor may increase capital transfers and technology transfers. However, it may restrict the development of domestic sector. Tax incentives can take form of deductibility for certain types of expenditures, special exclusion and exemptions. They also can be the decrease in customs duties and import tariffs.

This paper will focus on assessing the advantage and disadvantage of tax incentives. It discusses some certain types of tax incentives to determine whether they are effective or not. It also gives example of situations in which tax incentives take place. Finally, this paper proposes some ideas about how to use tax incentives as the effective tools to promote economic development and avoi...

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...m. While tax incentives in developing countries focus on development objectives such as job creation and economic development, tax incentives in developed countries target on social objectives like environmental protection and reservation.

It is very important to consider the benefits and the costs of a tax incentive program before implementing. Some tax incentive programs result in the benefits immediately, but they may cause a huge loss for society in future. Tax holiday is an example. Therefore, monitoring tax programs is essential to keep them on track. In order to design an effective tax incentives program, the legislator needs to answer four important questions: What are the objectives of the tax incentive programs? What types of tax incentive program should be use? How much does the tax incentive program cost? And, how to monitor the tax incentive program?