Tax expenditures

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% 14% 6% 1% 0% 5% 0% 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 0% 6% 2% 6% 0% 1% 59% 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 Efficiency Neutrality 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% 30,00% 25,00% 20,00% Tax expenditures 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Nominal tax rate Implicit tax rate Less tax expenditures... % of gross taxable income 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 1984 1987 1990 1993 1996 1999 Foreign tax credit Notional WT coord. Centres 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 0,80 1,00 GINI Indexes 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 9 Interest rates 8 7 6 5 4 3 2 1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Years Savings accounts, exempted One year bank deposit, net interest rate One year bank deposit: gross interest rate 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)