Abstract
Governments need to put
in more effort in attracting investors into their country through tax reforms
if it wants to achieve economic growth and enhance standards of living. The
research considered certain variables that affect investor’s decision as to
where to invest. These included the location, type of activity and time
variables, which were very important due to the fact that, the laws pertaining
to each one of them concerning the tax rate to be paid, incentives, exemptions,
relief and holidays to be enjoyed varies.
The data for the research
were obtained from both primary and secondary data. To obtain first hand information on
whether investors in the country did consider the tax system in their
investment decision, the study used questionnaires and interviews. The researcher
designed 22 questions for the taxpayers and was distributed to 30 companies and
individuals.
In the research, it was
discovered that tax
laws influences investment and location decision and for that matter a very
important tool in attracting investors into the country. Again, the tax incentive that has the
greatest impact on investment was also the reduction of corporate tax rate.
However, certain constraint such as the level of interest rate and uncertainty
about the economy were also discovered.
The researcher
recommended that there was
the need for reforms of the general tax system by
creating efficiency and transparency in tax collection and elimination of
unnecessary taxes and levies, which adds unnecessary costs to transactions.
KEY WORDS: TAX
REFORMS, INVESTMENT DECISIONS, INCENTIVES, TAX SYSTEM, TAX RELIEF, INTEREST
RATE.
CHAPTER ONE
1.0
INTRODUCTION
Every government and
most especially those in the developing economies are concerned about the
economic growth of their nation. As a result, they put in much effort to
achieve higher rate of economic growth and raise the standard of living of its
citizens.
The critical issue has
been how to attract investors and generate the needed resources domestically
using tax instruments that are least harmful to both the government and the
investors. This will obviously involve reforming the tax system to ensure
efficiency by widening the tax net without necessarily increasing the tax rate.
Governments continue to
encourage foreign investment as an integral part of its economic policy. Ghana
embarked on a privatization program in the early 1990s. The government at one
point controlled more than 350 state-owned enterprises but nearly 300 were
privatized by the end of 2000 and as at December 31st 2005, 351 had
been privatized leaving just a handful of state-owned enterprises. For example,
the government’s, stated priority privatization in the 2007 budget included Ghana Telecom,
Western Wireless (Westel), Tema Oil Refinery, Ghana Oil Company and State
Insurance Company. They also pursued privatization through selling of
State-owned shares on the Ghana Stock Exchange (GSE).
The government
recognizes attracting foreign direct investment requires an enabling legal
environment and has passed laws that encourage foreign investment and repeated
some that has previously stifled it. In the United States for example, there
was a decline in investment some years ago. In order to stimulate investment, a
new tax Act was introduced in 2002 and 2003. This helped the economy to regain
its stand by the late 2003, investment returned to its pre-recession trend and
the economy expanded at a healthy rate of 3.9% and despite the dislocations
that was as a result of the hurricanes and steep rise in energy prices, registered
3.2%. A research conducted in United States by a Joint Economic Committee
presented a case that, “lowering the cost of capital through tax legislation
can be both timely and effective in stimulating economic growth”.
Governments need to put
in more effort in attracting investors into their country through tax reforms
if it wants to achieve economic growth and enhance standards of living.
The most important
source of government revenue is from tax. According to the 2006 budget, the
government introduced some tax incentives for venture capital investment and
reduced tax rate on personal and corporate income in order to strengthen the
private sector and enhance the disposable income of householders. Tax rate for
companies in categories A and B were lowered, and rate for other categories
were abolished with regard to the National Reconstruction Levy.
Various studies have
shown that changes in the tax system have great impact in investment decisions.
Feldstein (1982) observed that “adverse changes in the tax variables since 1965
have depressed investment by more than 40%” Hassett and Hubbard “recent
empirical studies appear to have reached a consensus that the elasticity of
investment with respect to the tax-adjusted user cost of capital is between
-0.5 and -1.0” Hassett and Hubbard cited other studies that concluded that tax
over the last forty years have had a large effect on investment. A research by
House and Shapiro showed that temporary investment tax incentives did stimulate
investment.