Corporate Income Tax Exemption: The Worst Form of Tax Incentive?

To attract Foreign Direct Investment crucial for their development, developing countries are multiplying the number of tax incentive schemes, and in particular Corporate Income Tax (CIT) exemptions. Dama et al. (2023) establish that this type of tax incentive is regressive, and therefore redundant and inefficient: More profitable firms benefit more from CIT exemptions (regressivity) and would have invested even without these exemptions (redundancy and inefficiency). Developed countries prefer CIT credits to CIT exemptions in their incentive systems. These credits improve the targeting of desired investments and reduce tax revenue losses.

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Reference: Dama, A. A., Rota-Graziosi, G. & Sawadogo F. (2023) “The regressivity of tax incentives in Africa’’, International Tax and Public Finance, December.