The Impact of Tax Incentives on Regional GDP Growth: A Systematic Literature Review
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Abstract
Research aims: This study aims to evaluate the effectiveness of tax incentives
as a fiscal policy tool for stimulating regional economic growth. Specifically, it
addresses the extent of their impact on GDP, identifies the most effective
types of incentives, and compares their efficacy between developed and
developing nations.
Design/Methodology/Approach: Following the PRISMA 2020 guidelines, a
Systematic Literature Review (SLR) was conducted using the Scopus database.
The search strategy focused on the intersection of tax incentives, regionallevel
analysis, and economic growth outcomes. After a rigorous screening of
147 records based on document type, language, and open-access availability,
35 empirical articles were selected for qualitative synthesis.
Research findings: The synthesis reveals that tax incentives generally serve as
a positive catalyst for regional economic performance by reducing the cost of
capital and boosting Total Factor Productivity (TFP). Value-Added Tax (VAT)
reforms and Special Economic Zones (SEZs) were identified as the most
effective instruments. However, the study also found that effectiveness is not
universal; negative outcomes can occur due to resource misallocation and
rent-seeking when governance is weak.
Theoretical contribution/Originality: This research contributes to the fiscal
policy literature by synthesizing global evidence into a clear dichotomy of
impact. It clarifies that while tax incentives in developing economies act as
"growth accelerators" with high marginal returns, they function as "allocative
precision tools" in developed economies to address spatial disparities or niche
sectors like green energy.
Practitioner/Policy implication: Policymakers in developing nations should
prioritize structural reforms, such as VAT input credit mechanisms, over
temporary tax holidays to ensure long-term investment. For developed
nations, the focus should remain on place-based policies while rigorously
monitoring "deadweight loss" to prevent the mere displacement of economic
activity.
Research limitation/Implication: The study is limited by its reliance on Scopusindexed,
English-language, and open-access articles. The methodological
heterogeneity of the included studies also precluded a formal meta-analysis.
Future research should utilize longitudinal data to compare the long-term
fiscal sustainability of VAT reforms versus traditional tax holidays.
as a fiscal policy tool for stimulating regional economic growth. Specifically, it
addresses the extent of their impact on GDP, identifies the most effective
types of incentives, and compares their efficacy between developed and
developing nations.
Design/Methodology/Approach: Following the PRISMA 2020 guidelines, a
Systematic Literature Review (SLR) was conducted using the Scopus database.
The search strategy focused on the intersection of tax incentives, regionallevel
analysis, and economic growth outcomes. After a rigorous screening of
147 records based on document type, language, and open-access availability,
35 empirical articles were selected for qualitative synthesis.
Research findings: The synthesis reveals that tax incentives generally serve as
a positive catalyst for regional economic performance by reducing the cost of
capital and boosting Total Factor Productivity (TFP). Value-Added Tax (VAT)
reforms and Special Economic Zones (SEZs) were identified as the most
effective instruments. However, the study also found that effectiveness is not
universal; negative outcomes can occur due to resource misallocation and
rent-seeking when governance is weak.
Theoretical contribution/Originality: This research contributes to the fiscal
policy literature by synthesizing global evidence into a clear dichotomy of
impact. It clarifies that while tax incentives in developing economies act as
"growth accelerators" with high marginal returns, they function as "allocative
precision tools" in developed economies to address spatial disparities or niche
sectors like green energy.
Practitioner/Policy implication: Policymakers in developing nations should
prioritize structural reforms, such as VAT input credit mechanisms, over
temporary tax holidays to ensure long-term investment. For developed
nations, the focus should remain on place-based policies while rigorously
monitoring "deadweight loss" to prevent the mere displacement of economic
activity.
Research limitation/Implication: The study is limited by its reliance on Scopusindexed,
English-language, and open-access articles. The methodological
heterogeneity of the included studies also precluded a formal meta-analysis.
Future research should utilize longitudinal data to compare the long-term
fiscal sustainability of VAT reforms versus traditional tax holidays.
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