Business – 6.1 External influences – Economic | e-Consult

Tax incentives are a popular tool for encouraging new business formation. Their main advantages include:

• Reduced initial costs: Lower corporation tax or tax credits increase cash availability for investment and hiring.
• Signal of government support: Creates a favourable business climate, attracting both domestic and foreign entrepreneurs.
• Targeted encouragement: Incentives can be designed for specific sectors (e.g., green technology), steering innovation where needed.

However, there are notable disadvantages:

• Revenue loss: Reduced tax receipts can strain public finances, especially if the incentives are broad rather than selective.
• Potential for abuse: Companies may restructure to qualify for benefits without delivering genuine entrepreneurial activity.
• Distortion of competition: Firms not receiving incentives may be disadvantaged, leading to market inefficiencies.

In sum, while tax incentives can stimulate start‑up activity, careful design and monitoring are essential to mitigate fiscal and market distortions.