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The impact of tax expenditures on economic growth: The US experience

Author

Listed:
  • Maria O. Kakaulina

    (Financial University under the Government of the Russian Federation, Moscow, Russia)

  • Nikita A. Kazansky

    (Financial University under the Government of the Russian Federation, Moscow, Russia)

Abstract

In the last decade, assessing the tax expenditures’ economic efficiency has grown in importance due to the increasing number of situations where stakeholders use tax benefits for personal enrichment. The problem is aggravated by the very nature of tax expenditures, which represent budget revenue losses. The expediency of tax expenditures can be proved by estimating their impact on economic growth. The paper aims to measure such impact using the case of the USA. Methodologically, the study relies on Barro’s conception of endogenous growth. The study applies econometric methods of analysis. The data for the study is taken from the Global Tax Expenditures Database (GTED), the U.S. Department of the Treasury, the U.S. Bureau of Economic Analysis, and the U.S. Census Bureau for 1998–2022. The results indicate no correlation between the share of tax expenditures in a specific sphere in the total amount and their efficiency (the strength of the positive impact on GDP). For instance, the tax expenditures in commerce and housing have the greatest share (35.4 %), yet their impact is relatively weak compared to other categories of tax expenditures: 1 dollar of expenditures induces a 0.04 dollar increase in GDP. At the same time, tax expenditures in the social sphere with an insubstantial share of 2 % generate a 10 times higher return (a 0.49 dollar increase in GDP per 1 dollar of expenditures). Therefore, the structure of tax expenditures with an explicit social orientation appears to be the most preferable for the USA.

Suggested Citation

  • Maria O. Kakaulina & Nikita A. Kazansky, 2023. "The impact of tax expenditures on economic growth: The US experience," Journal of New Economy, Ural State University of Economics, vol. 24(4), pages 41-63, January.
    • Handle: RePEc:url:izvest:v:24:y:2023:i:4:p:41-63
    DOI: 10.29141/2658-5081-2023-24-4-3
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    References listed on IDEAS

    as
    1. Olga V. Bogacheva & Tatiana V. Fokina, 2017. "Evaluation of Social Tax Expenditures Efficiency in OECD Countries," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 3, pages 22-36, June.
    2. Figari, Francesco & Riscado, Sara & Barrios, Salvador & Coda Moscarola, Flavia & Gandullia, Luca, 2019. "The fiscal and equity impact of social tax expenditures in the EU," EUROMOD Working Papers EM20/19, EUROMOD at the Institute for Social and Economic Research.
    3. Maria O. Kakaulina & Dmitry R. Gorlov, 2022. "Assessment of the Impact of Tax Incentives on Investment Activity in Special Economic Zones of the Russian Federation," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 21(2), pages 282-324.
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    More about this item

    Keywords

    economic growth; tax expenditures; tax benefits; gross domestic product; budget expenditures;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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