Are all tax incentives bad?

Tax incentives, like taxes themselves, can be used and abused, and should be treated with extreme caution. Usually, tax incentives are offered for all the wrong reasons and it is very rare that these incentives are scrutinised or audited to see if they have achieved their purpose. Even in the cases where it can be shown that a tax incentive did bring an investment, there is almost never a cost-benefit analysis weighing the local investment benefits against losses in other areas, such as lost tax revenues due to other players taking advantage of the incentive, or the loss of faith in public officials as foreign multinationals are seen to be free-riding on local taxpayers.

Many high-income countries implemented tax incentives during their development process and in this sense, they could be thought of as a useful tool to be utilized by lower or middle-income countries. Other good uses of tax incentives include support for social or environmental goals, such as protecting the environment or promoting gender or racial equality. However, many if not most modern tax incentives are harmful, both for the jurisdiction providing it and for other countries which suffer "spillovers" from these incentives. 

Many countries, particularly developing countries, have been persuaded that offering tax incentives will attract investment to their economies. However, as the IMF and others have shown, these incentives usually don't attract the investment, or simply lower the tax payments of multinationals which were going to invest and operate in that jurisdiction anyway. What multinationals really want in places where they invest is good infrastructure, stable politics, a healthy and educated workforce, and access to markets.

The IMF and others differentiate between "cost-based" tax incentives, where exemptions are granted on the basis of job creation, say, or real capital investment; and "profit-based" incentives which are granted simply because the company is engaged in specific for-profit activities. In general terms, all the research shows that cost-based incentives can in some cases be effective in achieving national goals, while profit-based incentives are ineffective and generally harmful, needlessly giving away tax revenues. Cost-based incentives are more likely to attract new factories or job-creating activities, whereas profit-based ones are more likely to attract profit shifting.