This is not without risks though, as the special zones could be difficult to dismantle, even following fundamental reform. In that case the disadvantages of that approach (e.g., profit shifting) need to be weighed against the costs of discouraging investment in the entire country.30. Having an official business, such as a film commission, does cost money. 63(11) pp. From Disabled and $500k in Debt to a Pro Blogger with 5 Million Monthly Visitors, 10 Profit Sharing Plans Advantages and Disadvantages, 15 Incentive Contracts Advantages and Disadvantages, 16 Advantages and Disadvantages of Transactional Leadership, 15 Things About Brand Advocates You Need to Know, "From Disabled and $500k in Debt to a Pro Blogger with 5 Million Monthly Visitors. Cons. 1–15. Does International Tax Competition Harm Developing Countries More than Developed? We won't send you spam. 269–304. Identifying the optimal incentive is thus complicated as it depends on the exact nature of the industry and of the international competition. If firms are permitted to take depreciation allowances after the holidays period, then there is no such effect, and effective tax rates are even lower. There is, however, an unnecessary revenue cost in that activities yielding location-specific rents benefit equally. For an overview of cash-flow taxes see Institute for Fiscal Studies (1978), for ACE taxes see Devereux and Freeman (1991); for an overview of their practical applications, see Klemm (2007). An investment allowance or tax credit could even lead to a negative EMTR.28 An accelerated depreciation scheme with less than full deduction in the year of acquisition would also reduce the EMTR, but not to zero. They find that, unless head taxes are available and unconstrained, the welfare effect of using tax incentives is theoretically ambiguous,15 although simulations show that under reasonable assumptions providing incentives to mobile capital can be beneficial. This assumes that taxes are paid after the eight-year holiday. Under this approach, mobile firms would continue to find it attractive to operate in a high tax country, because they would simply shift their paper profits elsewhere, either by manipulating transfer prices or with the help of their financial structure (i.e., using more debt-finance in high tax jurisdictions). Equally, any other small nuisance taxes should be abolished right away rather than wasting resources on both their collection and on monitoring exemptions. Yes, it does take work and cost money upfront, but you have to think long-term. In principle, it is possible to think of situations in which a tax holiday could be a useful tool. Crowding out of other investment may be a serious problem, because this will occur through two channels. HinesJ.R1999 “Lessons from Behavioral Responses to International Taxation” National Tax JournalVol. So should states fund tax incentives for film and television work, or are film commissions a waste of money? Then a vacation day with a raise. People will typically work to the expectation levels that are set for them. This will depend on the costs and benefits of the incentives employed, including any general equilibrium effects. Typically such studies count the direct financial costs from tax revenue given up and compare them to the benefits in terms of higher employment and activity and resulting tax revenues. The main references are Bird (2000), Shah (2005), OECD (2001) and Zee, Stotsky and Ley (2002). It gives examples of situations in which incentives have no justification, such as in the presence of a location-specific rent, as well as examples where some, but not all incentives, may be useful. and N.Allen2001 “Tax Holidays to Attract Foreign Direct Investment: Lessons from Two Experiments” in: L.T.WellsN.J.AllenJ.Morisset and N.Prinia“Using Tax Incentives to Compete for Foreign Investment—Are they Worth the Costs?” Foreign Investment Advisory Service Occasional Paper 15. A good example of this is Ireland, which replaced a split rate system with a 10 percent rate on manufacturing and a 28 percent rate on other activity by a single rate of just 12.5 percent.