Tax Expenditures and Sustainability. An Overview

Fiscal policy has significant effects on a broad sustainability agenda covering long-term economic, social and environmental goals. However, whereas a myriad of actors scrutinize taxation as well as direct government spending with regard to their impact on sustainability, a key feature of fiscal policy has only partially hit the radar screens in the sustainability debate: Tax Expenditures. Tax expenditures (TEs) are benefits granted through preferential tax treatment that lower government revenue from the beneficiary taxpayer. Research on the links between these schemes and sustainability is scarce, and mostly focused on a single TE or a group of TEs pursuing the same policy goals, the effects of TEs on a single dimension of sustainability, as well as on a specific country, region or trade bloc. Against this background, the goal of this discussion note is threefold: i) to introduce the reader to the concept and overall significance of TEs; ii) to outline an analytical framework to evaluate the impact of a selected group of TEs on sustainability and; iii) to provide an overview on specific TEs, including TEs in both developing and developed economies, and to assess their alignment with a broad sustainability agenda, as well as their effectiveness and efficiency.