CHAPTER ONE
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.