United nations of tax incentives

Part II
Tax Incentives—Practical Aspects

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Chapter I
Checklist for drafting tax incentives 
legislation: focus on income tax*
I . Introduction
The design of broad based taxes such as income tax is typically assessed by 
reference to general principles such as fairness, efficiency and simplicity. 
By definition, tax incentives are exceptions to general rules. Inevitably, 
they are inconsistent with fairness, in the sense of the tax applying 
equally irrespective of the type of activity conducted. Tax incentives 
also necessarily raise complexity through the exceptions they make as 
those exceptions must interface with the general rules applicable to the 
tax. Tax incentives are usually justified by reference to the government 
seeking to promote a particular economic goal, and if this goal is 
sufficiently important then it may outweigh the negative fairness and 
complexity issues raised by the incentive. Tax incentives always raise 
questions as to the balance between competing tax principles.
The economic case for a tax incentive is critical to its 
justification and here the policy and expected benefits of the incentive 
need to be clear for many reasons. The residual position with a broad 
based tax such as income tax is that all earning activities should be 
treated equally. Historically, it was thought that this would be the 
best way to ensure that resources are allocated to where they are most 
productive. This is the principle of neutrality. In the twenty-first 
century the position on neutrality has become confused, particularly 
as a result of globalisation. It is also argued that in cases of imperfect 
market allocation of resources (market failures) it is appropriate for a 
tax to intervene to improve the market allocation. This is the manner 
in which tax incentives are most commonly sought to be justified.
This background is critical when designing and drafting 
the legal rules to implement a tax incentive. If earning activities are 
treated similarly under a tax law, then the need to pay close attention
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Prepared by Peter Harris, Professor of Tax Law, University of Cambridge.

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38
Design and Assessment of Tax Incentives
to the borders between different types of activity is minimised. If some 
activities are singled out for special treatment under a tax incentive, 
those activities must be particularised accurately. If they are not, 
people will seek to arrange their affairs so that they fall within the 
incentive even if the actual activities they conduct do not fall within 
the rationale for granting the incentive. This is often viewed as tax 
avoidance and causes tension between the tax administration and 
taxpayers. However, the source of the problem is often that the tax 
policy underlying the incentive is not clear, the law is not clear or the 
manner in which the tax incentive is to be administered is not clear.
As its name suggests, the purpose of the 
Checklist for Drafting 
Tax Incentives Legislation 
is to serve as a list of things that should 
be considered and addressed when drafting a tax incentive so as to 
maximise clarity of scope and administration. It seeks to ensure that 
the legal drafting of a tax incentive is as consistent as possible with the 
policy underlying the tax incentive. It may also be used in the reverse, 
that is to say as a list of the policy decisions that need to be made 
to ensure that the tax policy underlying an incentive is sufficiently 
comprehensive and particularised.
What the 
Checklist 
does not do is provide any guidance on 
how a particular tax incentive should be justified from an economic 
perspective. It is critical that governments engage in economic 
justification both for the introduction and continuation of tax 
incentives and the 
Checklist
presumes that this happens.