The Worst Form of Tax Incentives: CIT Exemptions

Grégoire Rota-Graziosi (), Alou Adessé Dama and Fayçal Sawadogo ()
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Grégoire Rota-Graziosi: CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne
Fayçal Sawadogo: CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne

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Abstract: Based on 2020's tax information, we compute the EATR of a representative firm with and without investment incentives for 44 African countries. We then appreciate the EATR profiles as the gross profitability of firms varies. These simulations allow us to appreciate the progressivity or regressivity of national tax systems through the variation of the tax burden in the gross firm's profitability. Under tax incentives regimes, 20 out of the 44 countries present a regressive EATR profile: They tax more lower profitable firms. We emphasize that 75% of these countries use Corporate Income Tax (CIT) exemption as their main tax incentive instrument. We consider an alternative tax incentive mechanism: CIT credits. This instrument appears superior in many dimensions: (1) Tax credits keep and may even establish the progressivity of the tax regime; (2) They are less costly to follow for the tax administration explaining an apparent paradox: CIT expenditures are on average lower in countries providing exemption than in countries with CIT credits.

Date: 2021-11-09
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Published in 9th International Workshop on Domestic Revenue Mobilisation: “Tax Expenditures and DRM”, The German Development Institute (DIE/GDI), in cooperation with the Addis Tax Initiative (ATI) and the Council on Economic Policies (CEP), Nov 2021, Online, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03525880

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