Tax Policy Debate Over Tax Incentives in Developing Countries: the Case of Egypt

Abstract

Tax policy is normally formulated and implemented during politically stable periods. The collapse of the Soviet Union and Eastern bloc countries in the early 1990s have allowed researchers to study tax policy reform in transition economies with changing political and economic systems. This article aims to examine tax policy challenges in Egypt as a result of the revolution in 2011. Egypt has been chosen because of its importance in the Arab world and its interesting tax reform, including a rationalisation of tax incentives. It is found that Egypt has adopted a combination of counter-cyclical government expenditure policy and pro-cyclical tax policy in an era of political transition. This combination is interesting as it is well known that developed countries tend to employ counter-cyclical fiscal policy whereas developing countries tend to utilise pro-cyclical policy. It is proposed that the Egyptian government should consider modernising its tax administration and enhancing its anti-tax avoidance activities as an alternative to increasing tax rates in pursuing its pro-cyclical tax policy.