United nations of tax incentives

Resource allocation costs
If tax incentives are successful, they will cause additional investment in 
sectors, regions or countries that would not otherwise have occurred. 
On the one hand, the additional investment will occasionally correct 
for market failures; on the other hand, the tax incentives may cause 
allocation of resources that could result in too much investment in 
certain activities or too little investment in other non-tax favoured areas.
It is difficult to determine the effects of tax provisions in 
countries where markets are relatively developed. It is even more 
difficult to determine the consequences of tax provisions in developing 
countries where the markets do not reflect the existing competitive 
models. As such, where markets are imperfect, it is not clear whether 

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17
Part I: Theoretical Background
providing tax incentives to correct market imperfections will make 
markets more competitive.
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Enforcement and compliance costs
As with any tax provision, there are resource costs incurred by the 
Government in enforcing the tax rules and by taxpayers in complying. 
The cost of enforcement relates to the initial grant of the incentive and 
the costs incurred in monitoring compliance with the qualification 
requirements and enforcing any recapture provisions upon termination 
or failure to continue to qualify. The greater the complexity of the tax 
incentive regime, the higher the potential enforcement and compliance 
costs. Tax incentive schemes that have many beneficiaries are also 
more difficult to enforce than narrowly targeted regimes.
It is difficult to motivate revenue authorities to spend resources 
monitoring tax incentive schemes. Revenue authorities seek to use 
their limited administrative resources to improve tax collection, so it 
is not surprising that they prefer auditing fully taxable firms rather 
than those firms operating under a tax holiday arrangement.