UNIVERSITY ALEKSANDËR MOISIU

FACULTY OF BUSINESS
DEPARTMENT OF FINANCE AND ACCOUNTING

FINANCE AND ACCOUNTING

(Academic year 2022-2023)

COURSE PROJECT

The Impact of Tax Incentives in Economy Development

COURSE: PUBLIC ACCOUNTING

Done by: Brikena Alla

Xhanersa Bilali
Accepted by: Msc. Hatixhe Shtaro DURRËS, 2023

Contents
WHAT ARE TAX INCENTIVES?..................................................................................................................3
WHEN WOULD YOU USE TAX INCENTIVES...............................................................................................5
WHO SHOULD USE TAX INCENTIVES TO SUPPORT COMMUNITY HEALTH AND DEVELOPMENT?...........6
Pseudo-incentives....................................................................................................................................7
Impact of Tax Incentives on Economic and Industrial Development.......................................................8
Tax Incentives For Businesses..................................................................................................................9
Economic Development Incentives Examples.........................................................................................9
Bibliography...........................................................................................................................................10

Tax incentives are designed to encourage investments in certain preferred sectors of the
economy and sometimes geared towards attracting inflow of foreign exchange to complement
domestic supplies for rapid economic development.
WHAT ARE TAX INCENTIVES?
An incentive is a benefit given to someone in order to encourage him to do something
specific. Tax incentives are ways of reducing taxes for businesses and individuals in exchange
for specific desirable actions or investments on their parts. Their purpose is to encourage those
businesses and individuals to engage in behavior that is socially responsible and/or benefits the
community. Perhaps the most familiar tax incentive to tax-paying Americans is the deduction for
charitable contributions: when figuring your taxes, you can deduct the amount you gave to
charitable, tax-exempt organizations from your taxable income. The deduction exists to help
persuade people to contribute to charity.

Tax incentives can be offered by any level of government that levies taxes: federal, state
or province, county, or municipality. They can be aimed at businesses, organizations, individuals
– any entity that pays taxes. In general, they take one of three forms:

TAX DEDUCTIONS.

Tax deductions allow you to subtract some or all of your expenses for certain things from
your taxable income (the amount that you pay taxes on). Your taxes are lower because you’re
taxed on a smaller amount.

Your business had income of $200,000.00 last year. You spent $20,000.00 on equipment to clean
the industrial waste from your operation. Since your state offers a 100% tax deduction to
businesses on spending for environmental improvements, you can deduct that $20,000.00 from
your income when you figure your taxes. Thus, you’ll only pay taxes on $180,000.00. In
practice, that would save you up to about $8,000.00.

TAX CREDITS.

A tax credit allows you to subtract some or all of your expenses for certain things from
the amount of taxes you have to pay. Your taxes are lower because you’re actually paying less,
even though you’re taxed on the full amount of your income.

Business tax rates vary, depending on the nature of the business and its amount of
income. The highest rate approaches 40%. Therefore, a tax credit of more than 40% of the
amount you spend will usually be more valuable than a tax deduction.

TAX REDUCTION OR FORGIVENESS.

In return for particular actions or investments, you don’t have to pay part or all of your
taxes – usually for a given amount of time. Your taxes are lower because they simply don’t have
to be paid. The example below concerns state business taxes, but municipalities might also
forgive property taxes (which, for an industrial facility, can represent a great deal of money) on a
similar schedule for similar reasons.

WHAT DO WE MEAN BY USING TAX INCENTIVES TO SUPPORT COMMUNITY

HEALTH AND DEVELOPMENT?

Federal, state, and local governments all use tax incentives for various purposes. Many
states and communities employ tax incentives simply to attract businesses. That use can have
many positive consequences for the public good, depending on the business: more local jobs,
more tax revenue (leading to the possibility of more funding for schools and services), an
injection of energy into the community, etc. However, it’s directly aimed at purely economic
concerns, rather than the building of a healthy community in all its aspects. Economic
development is certainly a contributor to most of these elements, but it’s hardly the only one. Tax
incentives can be used to stimulate action in a broad range of categories, such as housing, the
environment, health, and employment.

Tax incentives can be aimed at a variety of results. They can persuade businesses and
individuals to take positive action, and they may also, at least occasionally, be used to persuade
them to stop doing something harmful. The ways they can be used are limited only by the
creativity of those who devise them.

Tax incentives can be viewed in two ways. By providing an incentive for taking a
particular action or operating in a particular way, governments also provide a disincentive for
doing the opposite. The people who take advantage of the incentive are receiving a benefit that
others aren’t. This could just as easily be done by penalizing those who don’t follow the
recommended path – i.e., by making them pay more taxes, rather than offering others the
opportunity to pay less. By couching the difference in positive terms, however – offering a
reward for taking positive steps, rather than threatening punishment for not taking them –
governments make taking those positive steps easier to swallow, and create willing partners
rather than resentful adversaries. For that reason, this section focuses on incentives, rather than
disincentives. Keep in mind, however, that there may be times when using tax disincentives is
appropriate.

WHEN WOULD YOU USE TAX INCENTIVES?

Since tax incentives can be aimed specifically, there are a great number of possible uses
for them. How do you decide when their use is most appropriate? The general answer is that they
can be used almost anytime, often in combination with regulation and other types of incentives.
Some times when they come in particularly handy:

When you’re trying to encourage, limit, or manage growth. Tax incentives can be
used to encourage building and development in already-built-up areas, and thus to prevent
sprawl. They can influence the size of developments, invite the preservation of open space, spur
the redevelopment of abandoned sites, or foster the rehabilitation of empty buildings into
affordable housing. Whatever your community’s comprehensive growth plan, tax incentives can
almost always play a role in carrying it forward.

When you’re revitalizing neighborhoods, communities, or rural areas. Here, tax

incentives might be used to try to attract industry or commerce (and local jobs), to develop
mixed-income housing, or to bring in or rehabilitate an “anchor” institution (a theater, a museum,
a sports facility) to attract residents and businesses. In a rural area, you might employ tax
incentives to create environmentally friendly tourism (bicycle touring, farm stays, etc.), to
encourage farming, or to attract clean industrial operations.

When you’re trying to meet community needs. Tax incentives are often used to assist
in the development of affordable housing, but can also contribute to meeting needs in education
(business involvement in school systems), employment (job creation), livability (the creation of
pedestrian streets and walkable neighborhoods), health (the development of walking and bike
paths, subsidies for businesses’ health insurance plans), and transportation (support for needed
routes).

When you’re trying to prevent or fix environmental problems. Green building (using
environmentally friendly techniques and materials), the purchase and installation of anti-
pollution equipment, the use of alternative energy, energy conservation, environmentally
sensitive development, research into environmentally friendly industrial processes – all of these
and more can be made more attractive and feasible for businesses and individuals through the
offer of tax incentives.

When tax incentives can be part of a coordinated strategy. Often, a well-thought-out

combination of tax and other incentives, careful regulation and enforcement, and participatory
planning can yield the best results for a community-building effort.

WHO SHOULD USE TAX INCENTIVES TO SUPPORT COMMUNITY HEALTH AND

DEVELOPMENT?
Government at any level – any government that has the authority to levy taxes – can use
tax incentives to accomplish short- and long-term goals. For governments, the questions are not
who should use tax incentives, but whether to use them and when. The real “Who...?” question
here is “Who should support and advocate for tax incentives?” The answer to that question is
much broader, and has to do with who can benefit from them.

Governments only benefit from tax incentives in the sense that incentives encourage
actions that work toward the public interest. Maintaining and enhancing the public good is the
job of government, and it therefore has a stake in doing so. The direct benefits of tax incentives,
however, usually go to others. It makes sense for those who benefit to advocate with
policymakers to institute appropriate tax incentives, to support government action in doing so,
and to advocate for public support as well.
 Nearly anyone might benefit from tax incentives, but here’s a short list of people and
groups that you might see supporting them:

Direct beneficiaries of tax incentives. These may include low-income citizens, people without
health insurance, the homeless, etc.

 Human service providers and advocates for the poor. Since tax incentives can be
aimed at improving life for low-income citizens, the agencies and individuals that work
with that group may find themselves advocating for or suggesting them to policymakers.
 Economic developers and community planners. These folks are sometimes the
policymakers themselves, and are in a position to see that tax incentives are offered for
particular investments or types of development. If that’s not the case, they may still be
strong advocates for incentives that further their work.
 Local officials, especially those in economically depressed areas, or areas with other
problems that might be addressed through incentives. Local taxes may not present an
opportunity to offer appropriate incentives, in which case these officials might lobby state
legislators, the governor, or even the federal government, for incentives that would be
appropriate to carry their goals forward.
 Businesses, corporations, real estate developers, etc. Since these are on the receiving
end of tax incentives, it’s in their interest to advocate for them. Some corporations have a
civic conscience, and want to help the communities they do business in, but also have to
be accountable to shareholders. Tax incentives can help them satisfy both these needs.
 Environmental activists. Tax incentives can be particularly useful in furthering such
environmental ends as pollution control, energy conservation, and alternative energy use.
 Farmers. Tax incentives for sustainable agriculture equipment and practices, as well as
for keeping farmland in production, can help farmers stay on the land and preserve open
space in rural areas.

Pseudo-incentives

Regardless of the fact that an incentive spurs economic activity, many use the term to
refer to any relative change in taxation that changes economic behavior. Such pseudo-incentives
include tax holidays, tax deductions, or tax abatement. Such "tax incentives" are targeted at both
individuals and corporations.

Individual incentives

Individual tax incentives are a prominent form of incentive and include deductions,
exemptions, and credits. Specific examples include the mortgage interest deduction, individual
retirement account, and hybrid tax credit.
 Another form of an individual tax incentive is the income tax incentive. Though mostly
used in transitioning and developing countries, usually correlating with insufficient domestic
capita, the income tax incentive is meant to help the economic welfare of direct investors and
corresponds with investing in production activities and finally, many times is meant to attract
foreign investors.

These incentives are introduced for various reasons. Firstly, they are seen to
counterbalance investment disincentives stemming from the normal tax system. Others use the
incentives to equalize disadvantages to investing such as complicated laws and insufficient
infrastructure.

Corporate tax incentives

Corporate tax incentives can be raised at federal, state, and local government levels. For
example, in the United States, the federal tax code provides a wide range of incentives for
corporations, totaling $109 billion in 2011, according to a Tax Foundation Study.

The Tax Foundation categorizes US federal tax incentives into four main categories,
listed below:

 Tax exclusions for local bonds valued at $12.4 billion.

 Preferences aimed at advancing social policy, valued at $9 billion.
 Preferences that directly benefit specific industries, valued at $17.4 billion.
 Preferences broadly available to most corporate taxpayers, valued at $68.7 billion.
Corporate tax incentives provided by state and local governments are also included in the US
tax code but are very often directed at individual companies involved in a corporate site
selection project. Site selection consultants negotiate these incentives, which are typically
specific to the corporate project the state is recruiting, rather than applicable to a broader
industry. Examples include the following:

 Corporate income tax credit

 Property tax abatement
 Sales tax exemption
 Payroll tax refund

Impact of Tax Incentives on Economic and Industrial Development

Economic development tax incentives provide significant advantages and positive impacts
for growing businesses, both through tax incentives for investment in developing communities
and tax incentives for investment in developing countries. All tax incentives and impacts on the
tax structure of businesses have pros and cons that must be weighed. Trust advisors and tax
incentive experts assist growing companies in evaluating the effects of tax incentives. It is
important to consider both the pros and cons of tax incentives.

Though there are many advantages of tax incentives for businesses, growing companies
always need to determine if there are any negative effects of tax incentives, including the risk of
claw backs if a company does not perform the way they intended. Tax incentives are typically
offered to primary employers: those companies that create new capital as a result of their
operations. Primary employers are usually industrial operators, but can include headquarters,
logistics and distribution, and technology operators as well.

Tax incentives are typically devoted toward industrial companies, though other
commercial operators may be eligible for select economic tax incentives. Industrial growth
within a community creates the most opportunities for jobs and capital investment, both of which
are key to receiving the benefits of tax incentives for industrial growth. Industrial growth creates
demands for further growth and investment within a community, such as housing, retail, and
other commercial developments.

Therefore, tax incentives support both general economic growth and can lead to further
industrial development. In general, the effect of tax incentives is a positive one on a community
as it encourages other economic growth. With further economic growth comes more tax revenue
for a community to work with. This tax revenue supports schools, public safety, and other quality
of life initiatives within the community.

Tax Incentives For Businesses

Economic development tax credits and incentives come in many forms. These tax
benefits often are focused on large industrial or commercial developments that create many jobs
and involve large investments in real and personal property. Tax incentives for businesses are
generated from qualifying business activities that would themselves increase the amount of tax
revenue a community can receive. Investment in real property would increase the amount of real
property taxes. Therefore a property tax abatement reduces the tax liability a business would
have had to pay in order for that investment in real property to take place.

Many people also ask about tax incentives for activities separate from economic
development, such as asking do companies get tax breaks for hiring disabled people or tax
incentives for hiring minorities, etc. Tax incentives for business may have particular
requirements, such as hiring of a certain number of minorities or employees with disabilities.
Federal tax incentives, such as the Work Opportunity Tax Credit (WOTC) encourage businesses
to hire individuals with disabilities, military backgrounds, and criminal backgrounds. Tax credits
for small businesses are rare as small businesses often don’t have enough qualifying activities
(new jobs/new investment) to receive tax incentives.
Economic Development Incentives Examples
The economic development incentives definition is tax tools used by communities to
support business growth in one location versus another. Tax incentives examples include tax
credits, tax refunds, tax exemptions, tax abatements, tax reductions, and cash grants. There are
certainly more examples of tax incentives for businesses, these are just a few. Economic
development incentives are offered to business to encourage those businesses to make
investments and hire net new jobs in a particular location.

As a business chooses where to invest its future growth, the economic incentives offered
by state and local governments show the importance of incentives to the community’s economy.
This is the importance of incentives in economics. State and local governments have discretion
in offering economic development incentives, so businesses should follow economic
development incentives best practices. Governments incentivize businesses to growth in a
particular location and offer tax savings as a reward for locating within the government’s
jurisdiction. Government incentives for individuals are not offered, as individuals do not create
jobs or investment. Government incentives for businesses are awarded to companies which
create jobs and investment. Those businesses receiving tax incentives typically can pass the tax
savings along to their business owners, depending on the tax structure of the business and the
offered incentives. There are many government incentives examples that follow this framework,
but there are also local incentives examples to consider. Local incentives are just as important as
state level economic development incentives, but are often overlooked. A trusted economic
development credit and incentive specialist will pursue both state and local incentives as a best
practice.
Bibliography
Forstater, Maya, “The Good, the Bad, and the Ugly: How Do Tax Incentives Impact Investment?”, 2017.

Germán, Lourdes; Parilla, Joseph, “How tax incentives can power more equitable, inclusive growth”,
2021.

https://ctb.ku.edu/en/table-of-contents/implement/changing-policies/tax-incentives/main

https://en.wikipedia.org/wiki/Tax_incentive

https://mcguiresponsel.com/economic-development-tax-incentives/

https://www.europarl.europa.eu/RegData/etudes/ATAG/2022/733578/EPRS_ATA(2022)733578_EN.pdf

https://www.imf.org/external/pubs/nft/1998/tlaw/eng/ch23.pdf

https://www.oecd.org/tax/tax-global/transparency-and-governance-principles.pdf

Van Parys, Stefan, “The effectiveness of tax incentives in attracting investment: evidence from
developing countries”, 2012.