Tax incentives, again

Comments on a same topic.

blog-Los incentivos tributarios una vez másMiguel Pecho, in a recent publication, has developed a significant comment on tax incentives based on statistical studies. This has prompted us to additional brief thoughts on the matter.

It is a longstanding issue and our position comes from the experience we have gathered as a consultant in the taxation field – in many cases related to the CIAT – as well as personal contact with investors. This has led us to consider that the incentives are not ultimately an essential element in an investment decision.

The issue must be presented considering the two sides: the investor and obviously the state, through its tax policy. There is no doubt that investing involves a sacrifice for the State, and if it fails its objective, it results in an economic loss.

Regarding the investors we understand that some factors that are priorities for decision-making, among others; profitability, legal certainty, concrete plans in economic policy, tax system with accurate, stable regulation and a socio-political level which transmit transparency.

In regard to tax policy, incentives constitute preferential treatments which are identified through exemptions, deductions and other similar systems, which are reflected in quantitative benefits but can also affect the formal framework. Therefore, the uncollected amount is a public expenditure that results in a subsidy not accounted in the State Budget and therefore not approved or explained in the budget. They are provisions approved exclusively by tax regulations. (We are not referring to countries as USA, Japan and Germany, among others, which apply the so-called “tax expenditure budget”).

This means that in the “budget”, limits are established for expenses such as health, education and housing, while with the tax incentives instead there are no limit to subsidize business investment, which in our view is not logical.

Finally we must consider some negative consequences of incentives that are reflected in aspects such as; distortion of the technical structure and philosophy of taxes, in the erosion of the tax base as well as the breakdown of the horizontal and vertical equity.

From the above we understand that, if exemptions are taken into account in the potential collection, the burden is finally distributed among the paying taxpayers, who ultimately subsidize those who do not pay. It is an issue that deserves reflection.

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