Most OECD countries estimate tax expenditures. While tax expenditure estimates provide important information for evaluating the extent of government assistance to particular taxpayers and activities, care needs to be taken in interpreting the results, especially tax expenditure aggregates. Differences in tax systems and benchmarks make international comparisons of tax expenditures particularly difficult.
As a result of these difficulties no attempt is made to compare estimates of tax expenditures across countries. Instead the focus of this chapter is to provide a comparison of tax expenditure reporting across selected OECD countries.
The Australian Treasury publishes an annual Tax Expenditures Statement (TES) summarising Australian Government tax expenditure estimates. The 2005 TES listed around 270 tax expenditures with an estimated value of around $37 billion or 4.1 per cent of GDP in 2004-05 (Treasury 2005). This level has remained broadly constant over the past five years and is projected to remain so.
Australia’s approach of having a legal requirement to analyse tax expenditures, linking it to the government budget cycle, and covering a broad range of taxes appears to be in line with the approach followed by most OECD countries.
As discussed in Chapter 2 the main objective of any taxation system is to raise revenue to fund government activities.
The tax system also provides government with the opportunity to promote objectives other than revenue raising. A government can achieve some of these objectives by reducing taxes in selected areas to provide incentives for economic activities and to direct assistance (in the form of lower taxes) to particular groups, individuals, businesses or activities.
A tax expenditure is a tax concession that provides a benefit to a specified activity or class of taxpayer. A negative tax expenditure occurs when an additional charge is imposed rather than a benefit provided. Most tax expenditures provide a benefit to the taxpayer.
A tax expenditure can be provided in many forms, including tax exemption, tax deduction, tax offset, concessional tax rate or deferral of a tax liability.
Not all programmes delivered through the taxation system are regarded as tax expenditures. In Australia, a number of programmes which are delivered through the taxation system have been classified as direct expenditures under the Australian System of Government Finance Statistics (GFS) and are not counted as tax expenditures (ABS 2005). These include a number of refundable tax offsets, for instance, the Family Tax Benefit, the Research and Development Tax Offset and the Private Health Insurance Tax Offset.
The statistical concepts and classification principles used by the Australian Bureau of Statistics in compiling the GFS are based on an International Monetary Fund standard. Under the GFS classification, programmes delivered through the taxation system are not treated as part of the taxation system (and therefore as giving rise to tax expenditures) unless they are integral to the taxation system.
Direct expenditures could be used to deliver most tax expenditures. Tax expenditures deliver benefits through the taxation system and affect the budget position in a similar way to direct expenditures. Tax expenditures may be preferable to direct expenditures in promoting some government policy objectives. The advantages of using tax expenditures rather than direct expenditure include:
- they can influence private activity by affecting prices or returns, leaving decisions on the extent of participation to private decision makers; and
- they can reduce the extent of direct government supervision required of a policy.
The disadvantages of tax expenditures over direct expenditures include:
- there is usually a much lower level of public accountability for tax expenditures relative to direct expenditures. Expenditures through the annual budget tend to be scrutinised closely as part of the annual budgetary cycle;
- taxes affect prices, including tax concessions. There can be difficulties in setting the correct level of taxes or tax concessions to use prices to correct market failures. They may be ineffective in achieving specific objectives, including by under or overshooting the desired outcome or by offsetting the effect of other policy instruments;
- tax expenditures may be difficult to contain and may lead to erosion of the tax base over time as different groups compete for concessions;
- tax expenditures generally add to the complexity of the tax system; and
- tax expenditures make it more difficult to evaluate the size of government, both over time and in comparisons with other jurisdictions. For instance, pursuing government policies through tax expenditures can reduce both tax and direct expenditures, making government look smaller than if the same policies were pursued through direct expenditures.
Currently, the majority of OECD countries report on tax expenditures. Reporting on tax expenditures serves several functions, including:
- allowing tax expenditures to receive a similar degree of scrutiny as direct expenditures;
- allowing for a more comprehensive assessment of government activity; and
- contributing to the design of the tax system, by promoting and assisting the public debate on all elements of the tax system.
The Australian Government has recognised the importance of tax expenditure reporting by making it an integral component of its budget reporting and a requirement under the Charter of Budget Honesty Act 1998.