An Approach For Ex-Post Cit Gap Analysis And Ex-Ante Corporate Tax Incentives Evaluation

This paper provides a comprehensive evaluation of corporate income tax (CIT) incentives in Ethiopia by combining a top-down approach to estimate the CIT gap with ex-ante cost-benefit analysis (CBA) of selected tax expenditures. It introduces a national-accounts-based method to estimate the gross-of-tax return to capital (GTRC), offering a practical benchmark for assessing revenue loss and tax policy efficiency. The analysis reveals a growing CIT gap driven by declining effective tax rates, administrative inefficiencies, and the expanding use of tax incentives. Through case studies in the textile (export-oriented) and rubber/plastic (import-substitution) sectors, the paper assesses the fiscal, economic, and stakeholder impacts of incentives such as income tax holidays and import duty exemptions. Results highlight that while export-oriented incentives can yield significant net economic benefits, incentives in protected import-substitution sectors often result in resource misallocation and fiscal loss. The study emphasizes the need for evidence-based tax policy design, efficient VAT administration, and strategic alignment of incentives with national development goals to ensure economic efficiency and fiscal sustainability.