Abstract:

Globalization is knitting separate national economies into a single world economy. That is occurring as a result of rising trade and investment flows, greater labour mobility, and rapid transfers of technology. As economic integration increases, individuals and businesses gain greater freedom to take advantage of foreign economic opportunities. That, in turn, increases the sensitivity of investment and location decisions to taxation. Taxation provides governments with the funds needed to invest in development, relieve poverty and deliver public services. It offers an antidote to aid dependence in developing countries and provides fiscal reliance and sustainability that is needed to promote growth. Taxation is integral to strengthening the effective functioning of the state and to the social contract between governments and citizens. By encouraging dialogue between states and their citizens, the taxation process is central to more effective and accountable states. As globalization eviscerates national borders, governments in both developed and developing countries are discovering that their tax base is eroding, especially their ability to tax the proceeds and profits from corporate investment. International “tax competition” is increasing as capital and labor mobility rises. Most countries in Sub-Saharan Africa have pursued tax reforms to ensure that their economies remain attractive for investment. Having limited economic options the countries in the region have made tax competition a central part of their development strategy to attract and retain the companies in their countries. This paper reviews the debate about the effectiveness of tax incentives, examining the most-contested question: what are the costs of using them?