Tax incentives have the potential to play an integral role in spurring more equitable and inclusive growth but only if they are well-thought-out, carefully implemented and monitored. In this article, we’ll go over what exactly tax incentives are and why they can spark more inclusive growth.
What Are Tax Incentives?
Tax incentives are government policies that reduce the amount of taxes paid on certain activities or investments. These incentives are often used to encourage businesses to invest in areas where growth is slower or the local job market lacks opportunity.
There are two main types about the SR&ED tax incentives: The amount of qualified SR&ED expenditures can be used as a deduction against current or future year income, and an SR&ED investment tax credit is deducted against income tax.
More generally, there are several tax incentives, such as accelerated depreciation, special tax vacations and research and development credits.
Why Do Tax Incentives Matter for More Equitable Growth?
The goal of many types of economic policy is to ensure that economic growth provides benefits that reach all parts of society and all individuals within it. In other words, equitable economic growth.
Tax incentives can play an important role in helping economies grow equitably by providing targeted support where most needed and reducing costs for investors. When designed properly, tax incentives can spur investment from private companies in economically distressed regions; create jobs; build up local capacity through training programs; provide access to new markets; stimulate small business growth; attract new capital into disadvantaged communities; improve infrastructure projects; encourage cleaner production technology; etc…
Encourage Investment Into Local Communities & People
Lawmakers should seek out opportunities to create meaningful impact beyond just giving out tax deductions or credits. In particular when it comes to encouraging investment into local communities and individuals from underserved backgrounds who may not qualify for traditional forms of financing. For instance, some countries have established venture capital (VC) funds targeted at startups owned by low-income entrepreneurs so startups can benefit from up front access without having to wait for external investors (or any special subsidies).
Additionally, governments can also provide grants for small business owners who lack access to bank credit but could kick-start their operations with access to capital investments from government sources.
When Should Tax Incentives be used?
Tax incentives should only be used as a tool when it is clear that there will be a positive impact on overall economic progress rather than creating stagnant wealth transfer systems between businesses and state governments. Additionally, when proposing any incentive scheme there must be measures taken to ensure transparency. This avoids corrupt practices associated with resource redistribution such as fraud or favouritism towards certain companies over others simply because they have deeper political connections.
Finally, careful evaluation must be conducted throughout the implementation process. This makes it possible to monitor compliance with the objectives set and to create reports that are updated by the responsible agencies. They are regularly made public on the successes/failures encountered, but also on the corrective actions suggested if necessary to move forward.
Tax incentives have the potential to create more equitable economic growth but only if those incentives are designed correctly, carefully implemented and monitored. With careful consideration given toward its use, these incentive schemes could become key tools for reducing inequality and sparking more shared prosperity among populations around the world.