Managing the effects of tax expenditures on the national budget
AbstractTax expenditures, in the form of tax provisions, are government expenditures. They are conceptually and functionally distinct from those tax provisions whose purpose is to raise revenue. Tax expenditure programs are comparable to entitlement programs. Therefore, tax expenditures must be analyzed in spending terms and integrated into the budgetary process to ensure fiscal accountability. In addition, tax expenditures must be audited for performance and the information must be published (with comprehensive analysis) to ensure fiscal transparency. The author analyzes the concept and definition, size, and effects of tax expenditures, as well as the fiscal accountability and transparency of tax expenditure spending. In short, tax expenditures affect (1) the budget balance,(2) budget prioritization in allocation, (3) the effectiveness and efficiency of fiscal resources, and (4) the scope for abuse by taxpayers, government officials and legislators. While reviewing the current practices in tax expenditures against the requirements of fiscal accountability and transparency, she finds that this fiscal area must be strengthened. The author sketches four building blocks to strengthen tax expenditures toward fiscal accountability and transparency, based on the literature developed by Surry and McDaniel, the practices from industrial and developing countries, the Campos and Pradhan fiscal accountability model, and the International Monetary Fund's fiscal transparency code. The author argues that normative/benchmark tax structure, a revenue-raising component of the tax system, should be formalized. The normative/benchmark tax structure should be legally defined in the tax law and should be transparent. The tax receipts from this normative/benchmark tax structure should be quantified and published. Presently, many countries could publish imputed tax revenue from normative/benchmark tax structures because such data is available. Only if imputed tax revenue is published in the same way as the other budget components-tax revenue received, tax expenditures, direct expenditures, and fiscal balance-will a budget system be truly transparent in terms of revenue-raising activities and expenditure activities. In addition, when the tax revenue-raising activity is formalized, the inherent spending nature of tax expenditures is further exposed. Therefore, tax expenditures should be added to direct expenditures forming total government expenditures. Furthermore, the conventional concept of the size of government should be remedied by including both direct expenditures and tax expenditures.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3927.
Date of creation: 01 May 2006
Date of revision:
Public Sector Economics&Finance; Tax Law; Fiscal Adjustment; Public Sector Fiscal Adjustment; Economic Theory&Research;
This paper has been announced in the following NEP Reports:
- NEP-ACC-2006-06-03 (Accounting & Auditing)
- NEP-ALL-2006-06-03 (All new papers)
- NEP-MAC-2006-06-03 (Macroeconomics)
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- Hanna Polackova Brixi & Christian M.A. Valenduc & Zhicheng Li Swift, 2004. "Tax Expenditures--Shedding Light on Government Spending through the Tax System : Lessons from Developed and Transition Economies," World Bank Publications, The World Bank, number 15067, August.
- Campos, Ed & Pradhan, Sanjay, 1996. "Budgetary institutions and expenditure outcomes : binding governments to fiscal performance," Policy Research Working Paper Series 1646, The World Bank.
- Jose Edgardo Campos & Sanjay Pradhan, 1997. "Evaluating public expenditure management systems: An experimental methodology with an application to the Australia and New Zealand reforms," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(3), pages 423-445.
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