Tax expenditures drain revenues needed for development

Asian Development Bank | 30 September 2022

By Yuji Miyaki, Sissie Fung and Brian McAuley

Tax expenditures, in particular investment tax incentives, are widely used in Asia and the Pacific. These tax concessions are often introduced with the policy objective of attracting domestic and foreign investments, creating new jobs, and promoting sustainable economic growth. In practice, they represent a significant revenue loss for governments without providing visible value for money in most cases.

For many Asian Development Bank (ADB) member countries, the economic impact and net benefits of tax expenditures are poorly understood. In ADB’s workshops and surveys, senior tax experts from developing member countries identified rationalizing tax expenditures as a priority policy reform for raising tax revenues for the following reasons:

  • Tax expenditures are ineffective in achieving a country’s policy objective, distort the level playing field between businesses, create opportunities for tax abuse, and come with high compliance and administrative costs for tax administrations.
  • Tax expenditures often lack transparency and accountability. In many countries, these are granted by a variety of government agencies operating outside the Finance Ministry. This makes tax incentives susceptible to corruption and rent-seeking behavior, especially when they are discretionary and granted without institutional oversight or review.
  • Data on tax expenditures are not published on a regular basis. There is a lack of a framework for measuring the costs and benefits of tax expenditures, as well as their impact on economic behavior.

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