Tax Expenditure Reporting and Its Use in Fiscal Management

Abstract

Tax expenditures are alternative policy means by which governments deliver financial support to indi- viduals and companies. In Denmark, for example, the government makes direct payments to households with children, which appear on the expenditure side of the budget. In the United States, reducing the income tax paid by families with children provides similar assis- tance. In this case, however, the assistance to families with children does not appear on the expenditure side of the budget; it is reflected in reduced tax revenue on the revenue side. Many governments also provide incentives for busi- nesses to invest in their countries. As with assistance to families, this can be achieved in two ways: by directly paying for some of a business’s investment or by reducing the taxes of businesses that make investments. The cost of the first method would appear on the expenditure side of the budget under a category such as “industrial policy”; the second would be reflected in lower tax revenue. In these examples, the assistance to families or the incentives for businesses mean there is less money to fund other government priorities, whether deliv- ered through direct payments (outlay expenditures) or reduced tax revenue (tax expenditures). Govern- ments should devote the same amount of attention to controlling tax expenditures as to controlling outlay expenditures. Frequently, however, governments look much more carefully at outlay than at tax expenditures, and often they collect little or no information on the cost of tax expenditures. Tax expenditures must be managed as carefully as outlay expenditures if governments want to make efficient use of their limited financial resources. This means that the cost of tax expenditures must be iden- tified, measured and reported in a way that enables comparison of their monetary value with that of outlay expenditures.