Tax expenditures
Shedding light on government
spending through the tax system
Tax expenditures
• Thanks to China !
• Tax expenditures reporting in developed
countries (Christian Valenduc)
• The use and reporting of tax expenditures in
developing countries(Zhicheng Li Swift)
• Policy options (Hana Polackova Brixi)
Tax expenditures reporting in
developed countries
•
•
•
•
•
36 Years ago…
What is a tax expenditure ?
Pro and cons
Tax expenditure reporting
From reporting to tax policy analysis
What is a tax expenditure ?
• Deviation from a norm, a “benchmark tax
system”
• Loss of tax revenue
• Aim to change the behaviour by altering
relative prices
• Such a change could be achieved by direct
spending, in a more transparent way
Pro and cons of tax expenditures
• Encourage private sector
participations in economic
and social programs
• Promote private decision
making process
• Reduce the need for
governmental supervision
• Ineffectiveness: final
outcome may differ from
intended effects
• May result in inefficiency,
and inequities
• Erode revenue bases
• Complexity of tax laws
• Make the size of
government elusive
Tax expenditures reporting in
developed countries
•
•
•
•
30 Years ago…
What is a tax expenditure ?
Pro and cons
Tax expenditure reporting
Tax expenditures in Australia
% GDP
4,5%
4,0%
3,5%
3,0%
2,5%
2,0%
1998 1999 2000 2001 2002 2003 2004 2005
Years
Tax expenditures by function –
Australia 2001/02
0%
6%
1%
0%
0% 5%
14%
0%
6%
2%
6%
0%
1%
59%
General public services
Defense
Public order and safety
Education
Health
Social security and welfare
Housing
Recreation and culture
Fuel and energy
Agriculture, fisheries and industry
Mining and mineral ressources
Transport and communications
Other economic affairs
Other purposes
Not allocated
Ratio of tax expenditures / direct
expenditures + tax expenditures
Total
Other purposes
Other economic affairs
Transport and communications
Mining and mineral ressources
Agriculture, fisheries and industry
Fuel and energy
Recreation and culture
Housing
Social security and welfare
Health
Education
Public order and safety
Defense
General public services
0%
10%
20%
30%
40%
50%
60%
Tax expenditures reporting in
developed countries
•
•
•
•
•
36 Years ago…
What is a tax expenditure ?
Pro and cons
Tax expenditure reporting
From tax expenditures reporting to tax
policy analysis
Tax expenditures and tax policy
Neutrality
Efficiency
Incentives
Redistribution
Tax expenditures
Tax expenditures and tax policy
• Two trade-off
– Equity versus efficiency
– Neutrality versus incentives
• Tax expenditures are used to deliver incentives
• Tax expenditures may hamper efficiency and
equity
- Gap between and effective taxation
- Departure from uniform taxation
- In many cases, they reduce the progressivity of income
taxes
Tax expenditures and tax policy
• Corporate income tax reform in Belgium
during the nineties: a choice for neutrality,
against tax expenditures
• Tax expenditures in PIT and redistribution
Nominal and effective taxation
Corporate income tax - Belgium
50,00%
45,00%
40,00%
35,00%
Tax
expenditures
30,00%
25,00%
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20,00%
Nominal tax rate
Implicit tax rate
% of gross taxable
income
Less tax expenditures...
20%
15%
10%
5%
0%
1978 1981 1984 1987 1990 1993 1996 1999
Assesment year (calendar year+1)
Specific exemption for dividends
Investment allowance
Add. Employment allowance
Exempted profits of c.c
Less notional tax credits…
6,00%
5,00%
4,00%
3,00%
2,00%
1,00%
0,00%
1978
1981
Foreign tax credit
1984
1987
1990
1993
Notional WT coord. Centres
1996
1999
Other notional TC
Marginal effective tax wedge (KF)
6,00%
4,00%
2,00%
0,00%
-2,00% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
-4,00%
-6,00%
-8,00%
Par-Subs - co CC
+ CC debt
+ CC, new equity
+ CC retained profits
Tax expenditures and redistribution
Personal income tax, Belgium, 2000
Alimony payments
Domestic servants
Childcare
Gifts
Employers' shares
Pension savings - 2d Pillar
Pension savings
Life insurance
Mortgage interests
Mortgage cap. Rep
Taxable income
0,00
0,20
0,40
0,60
GINI Indexes
0,80
1,00
From reporting to tax policy
analysis
• Relevance: is the tax measure consistent
with policy priorities?
• Effectiveness: Is the tax measure meeting
its objective effectively, without unwanted
outcomes ?
• Efficiency: Is the tax measure the most
appropriate and efficient means to achieve
objective ?
Ineffectiveness: examples of
unwanted outcomes
• Tax expenditures for housing may be
capitalised in market prices
• Preferential tax treatment for pension
savings only changes the composition of
savings, with no add. household savings
• Preferential tax regimes for FDI
• Exempted savings accounts
Interest rates
from exempted and non-exempted
deposits
10
Interest rates
9
8
7
6
5
4
3
2
1
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Years
Savings accounts, exempted
One year bank deposit, net interest rate
One year bank deposit: gross interest rate
2000
2002
Tax expenditures
• Thanks to China !
• Tax expenditures reporting in developed
countries (Christian Valenduc)
• The use and reporting of tax expenditures
in developing countries(Zhicheng Li Swift)
• Policy options (Hana Polackova Brixi)