United nations of tax incentives

Costs associated with corruption and lack of transparency
Corruption can constitute a major barrier to foreign investment in 
a country but it does not, however, prevent foreign investors from 
benefiting from a corrupt system. In recent years, scholars have 
focused on the corruption and other rent-seeking behaviour associated 
with the granting of tax incentives. Several different policy approaches 
exist for designing the qualification requirements for tax incentives. 
Policymakers can choose between approaches that are automatic 
and objective or those that are discretionary and subjective. The 
opportunity for corruption is much greater for tax incentive regimes 
in which officials have a large amount of discretion in determining 
which investors or projects receive favourable treatment. The potential 
for abuse is also greater in cases in which no clear guidelines exist for 
qualification.
19 
Richard George Lipsey and Kelvin Lancaster, “The general theory of second 
best”, 
Review of Economic Studies
, vol. 24, No. 1 (1956–1957).

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Design and Assessment of Tax Incentives
The International Monetary Fund, the Organization for 
Economic Cooperation and Development (OECD) and the World Bank 
have projects that try to reduce corruption and provide assistance to 
countries to establish anti-corruption programmes.
 20 
One element 
of such programmes should be the monitoring of foreign investment 
projects and particularly the granting of investment incentives. If a 
tax incentive is found to have been improperly obtained, the attendant 
privileges should be withdrawn and any tax that has been avoided 
should be repaid, in addition to any other legal sanctions.
Estimates of the costs of tax incentives
Even when tax incentives succeed in attracting investment, the costs of 
the incentives may exceed the benefits derived from the new investment. 
This is difficult to substantiate, since problems exist with regard to 
estimating the costs and benefits of tax incentives. One method of 
cost-benefit analysis is to estimate the cost in terms of forgone revenue 
and/or direct financial subsidies for each job created. Studies using 
that approach may not provide a true measure of efficiency, because 
they measure only the cost, and not the value, of the jobs created. The 
cost of jobs varies widely according to the country and the industrial 
sector, and the more “expensive” jobs may bring with them greater 
spillover benefits, such as technology transfer.
All revenue estimates are based on a set of assumptions about 
the responses of taxpayers to particular tax law changes. In assessing the 
performance of tax incentive schemes, the objectives are to determine 
the amount of incremental investment resulting from tax incentives and 
the costs and benefits associated with attracting that investment.
Those objectives require that assumptions be made about: (a) 
the amount of investment that would have been made without the tax 
incentive programme; (b) the amount of leakage from the tax base due 
20 
See Organization for Economic Cooperation and Development (OECD), 
United Nations Office on Drugs and Crime and World Bank, Anti-Corruption Eth-
ics and Compliance Handbook for Business; Asian Development Bank and OECD, 
Anti-Corruption Initiative for Asia and the Pacific. Available from www.oecd.org/
site/adboecdanti-corruptioninitiative; Vito Tanzi, “Corruption around the world: 
causes, consequences, scope and cures”, 
Staff Papers, International Monetary Fund
, 
vol. 45, No. 4 (December 1998).

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