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

Tax expenditures by function – Australia 2001/02

Ratio of tax expenditures / direct expenditures + tax expenditures

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 Efficiency Neutrality RedistributionIncentives 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 Tax expenditures

Less tax expenditures...

Less notional tax credits…

Marginal effective tax wedge (KF)

Tax expenditures and redistribution Personal income tax, Belgium, 2000

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

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)