Factors for the formation of inefficient states when using tax incentive regimes

The article investigates the problem of adopting the tax incentives regime in certain industries. The general problem of tax benefits is their ineffectiveness, which often leads to results contrary to expected and also to losses in economy. So this paper aimed to define the reasons, factors and loss prevention of failures related to implementing the tax incentives regime. In order to analyze the subject area, we use the object and process modeling of it. Particularly, we use the optimization models and game-theory tools. We classified the types of tax incentives regimes in order to distinguish two targets for implementation of tax benefits: increase the government revenue and diversification the product line; and also three strategies of granting tax exemptions: overall, targeted, and individual tax incentives. We found that the strategy of granting overall tax exemptions potentially can lead to “free-rider problem”, and strategy of granting the targeted and individual ones can create conditions for arising of adverse selection mechanism. We defined the conditions leading to increase the tax revenues in process of adopting the tax incentives regime. Also the analysis of “principal-agent” model as Nash equilibrium allowed to find the conditions of arising the ineffective norm of interaction between government and investor, when the first satisfies the investor’s unjustified claim related to obtaining tax incentives. Obtained patterns, despite of their non-numerical character, can be useful in business decision-making, because the revealed ineffective norms and states define concrete threats, which should be considered by policymakers in the process of adopting the tax incentives regime. The future research can be related to extension of formalization of mechanisms of granting tax exemptions and of arising the inefficient states and norms of agents’ behavior; to development of mechanisms of prevention of inefficient states in the process of implementation of tax incentives regimes; to investigate their concrete evidence in the process of adopting the tax incentives regime in actual practice.