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Tax incentives are, in essence, subsidies given to private employers. Typically, governments offer these to businesses in hopes of getting them to locate in a given place. While there are exceptions to the rule, it would generally be better if governments did not give these incentives. There are at least two main reasons for this.
First, when government gives tax incentives to some businesses, but not to others, it is essentially getting involved in “picking winners.” It is favoring some businesses over others. When some businesses get tax breaks, government revenues decline. This can increase the amount of tax that other firms must pay. This is not fair as the government ends up treating different firms differently. If the government wants to attract business, it should pursue overall lower taxes and a good business environment so that its jurisdiction will be attractive to all businesses.
A second reason is that it is very hard to make sure the government gets its money’s worth from attracting the business. The government typically gives up tax revenue in hopes of gaining jobs. But it is not possible to force the firms to create the jobs. If the business does create the jobs, it is not possible to make them continue to employ that many people in the long run. Therefore, tax incentives sometimes backfire, with the government losing money and not getting the jobs to compensate.
It would be better for jurisdictions to simply have good tax codes and a good business climate.
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