Promoting Growth in the Caribbean : Tax Incentives in Theory and in Practice

The recent international financial crisis dealt a hard blow to the region's growth prospects, being reflected in reduced demand for financial services and tourism as well as falling remittances. This was combined in some cases with home grown macroeconomic imbalances and the need to face the costs of financial sector bailouts in other countries. More recently, policymakers have indicated the need to explore the use of tax incentives in order to foster much needed private investment. This policy note analyzes the issues associated with the use of tax incentives and reviews the challenges faced by the region, which has had a not altogether successful experience in controlling tax expenditures. The policy note is organized as follows: the first section explores the diverse nature of the Caribbean and Latin American group of countries referred to in this note: the Bahamas, Barbados, Belize, Dominican Republic, Guyana, Haiti, Jamaica, Suriname and Trinidad and Tobago. This is followed by a word of caution regarding the emphasis on factor accumulation in explaining growth, dampening beforehand any unrealistic expectations regarding growth promoting tax incentives. A brief analytical review of the main direct and indirect tax instruments is included in section three. Section four discusses features of good tax incentive systems. Section five reviews some country experience with provision of tax relief. Last section gives a brief set of recommendations.