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Tax Expenditures In The Eu: Recent Trends And New Policy Challenges

Author

Listed:
  • A. Turrini
  • J. Guigue
  • A. Kiss
  • F. Lanterna
  • A. Leodolte
  • C. Leventi
  • F. Neher
  • A. Papini
  • F. Picos
  • M. Ricci
  • K. Van Herck

Abstract

Tax expenditures are tax relief measures targeted at socially desirable activities or specific groups of taxpayers. Like spending programmes, tax expenditures can be used for allocative or redistributive purposes. At the same time, tax expenditures can make the tax system more complex, less transparent, may have adverse distributional impacts, and they can result in substantial revenue loss. Using the tax-benefit microsimulation model Euromod this chapter simulates the fiscal and distributional impacts of two specific sets of tax expenditures: those in personal income taxation (PIT) and reduced value-added tax (VAT) rates. The tax expenditures in PIT that are covered by this chapter are estimated to represent about 17% of tax revenues from PIT in the euro area (corresponding to about 1.4% of GDP on average). Reduced VAT rates represent about 16% of VAT paid by households in the euro area (corresponding to about 1.1% of GDP on average). Eliminating or reducing ineffective (or cost-ineffective) tax expenditures can create crucial fiscal space that allows for stronger fiscal consolidation, a revenue-neutral reduction in statutory tax rates, or growth-friendly tax shifts.

Suggested Citation

  • A. Turrini & J. Guigue & A. Kiss & F. Lanterna & A. Leodolte & C. Leventi & F. Neher & A. Papini & F. Picos & M. Ricci & K. Van Herck, 2025. "Tax Expenditures In The Eu: Recent Trends And New Policy Challenges," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(3), pages 7-17, November.
    • Handle: RePEc:euf:qreuro:0243-01
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    1. Ben Zeev, Nadav & Pappa, Evi, 2015. "Multipliers of unexpected increases in defense spending: An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 205-226.
    2. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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    2. García-Miralles, Esteban & Freier, Maximilian & Riscado, Sara & Leventi, Chrysa & Mazzon, Alberto & Abela, Glenn & Boyd, Laura & Brusbārde, Baiba & Cochard, Marion & Cornille, David & Dicarlo, Emanuel, 2026. "Fiscal drag in theory and in practice: A European perspective," European Economic Review, Elsevier, vol. 185(C).
    3. Christl Michael & Navarro Berdeal Silvia, 2026. "Tax expenditures and redistribution - The case of Portugal," JRC Working Papers on Taxation & Structural Reforms 2026-05, Joint Research Centre.

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    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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