New Blog Series: Tax Expenditure Policy Making and the Role of Parliaments

| 1 November 2023
Fiscal, Blog | Tags: GTED, GTETI, Parliaments, Tax Expenditures

This article is the introduction to a blog series on the critical role of parliaments in tax expenditure policy making. The contributing authors include members of parliament, government officials, and further experts in the tax expenditure field. Additional blogs in the series are available on the Netherlands, the Philippines, the United States, and Zambia. 

The role of parliaments within the tax policy cycle varies from jurisdiction to jurisdiction. In the European Union, for instance, the power to tax is in the hands of the Member States, with the EU having only limited competences. At the national level, the involvement of the parliament varies considerably from country to country (Grote, 2017). At the subnational level, the picture also changes significantly according to, among other things, the federal arrangement and fiscal decentralization characteristics. For instance, the Swiss tax system is characterized by a high degree of tax autonomy in the cantons (states), where cantonal parliaments play a key role regarding tax policy making decisions, e.g. when it comes to corporate as well as personal income taxation. The Confederation, by contrast, may levy taxes only to the extent permitted by the Federal Constitution.

Besides the exact responsibilities and duties across jurisdictions, there is a broad consensus that parliaments should be key actors within the tax policy decision making process – including decisions on tax expenditures (TEs), i.e. on the exemptions, deductions and further benefits offered through the tax system.

Parliaments should be key players in the approval of new TEs as well as in the reform (modification or elimination) of existing TE provisions. The introduction, modification or elimination of TEs without adequate scrutiny of parliaments should be limited to exceptional circumstances, defined by law. For the sake of policy coherence, TEs should be reflected in the budget and the government’s medium-term fiscal or revenue plan, which also should be included within the legislative process. Crucially, TE reports should be an integral part of the budget proposal and presented in a way that facilitates comparison with other budget expenditures, e.g., using the government’s classification of functions applied to direct spending programs (ECLAC/Oxfam 2020).

This notwithstanding, the picture regarding the role of parliaments when it comes to TE policy making is generally bleak. Indeed, as shown by the Global Tax Expenditures Database (GTED) and the Global Tax Expenditures Transparency Index (GTETI), the opacity in the TE field is striking in many jurisdictions, and hence, TE policy often escapes parliamentary scrutiny.

The global average revenue forgone stemming from the use of TEs over the 1990-2021 period covered by the GTED is significant, amounting to around 4 percent of GDP and 25 percent of tax revenue. Yet, more than 50 percent of the economies worldwide (113 out of 218) are non-reporting countries, i.e. no official TE report has been issued during this time (Redonda et al., 2023).

Equally worrisome, the scope and detail of most of the existing reports leave significant room for improvement, with the global average overall GTETI score at 47.5 out of a maximum of 100 points. Information about the fiscal cost (revenue forgone) as well as the policy goals of TEs is often not disclosed. Likewise, many countries only report aggregated revenue forgone data – mostly by type of tax – and do not detail the policy objectives and the legal basis for TE provisions.

Zooming in on the important role of parliaments, the GTETI also includes indicators that capture the integration (or lack thereof) of TE reporting within parliaments’ policy making. 30 percent of the assessed countries are not legally required to submit the TE report to the parliament (Indicator 2.2 Submission to Parliament). Two indicators seek to capture the integration with broader fiscal policy, with direct implications for parliaments. TE reports should be linked to the government’s Medium Term Strategy (MTS) by including both the fiscal cost of TEs as well as their policy objectives (Indicator 2.5 Medium-Term Strategy Integration). At the same time, TE provisions are implemented to pursue different policy objectives. Thus, Indicator 2.4 Budget Cycle Integration measures if revenue forgone estimates for each TE are included in the budget together with the description of the provision, information on the policy objectives, the beneficiaries as well as the classification of the functions of government (COFOG, or similar). In both cases, the distribution of countries covered by the GTETI is highly concentrated towards the lowest scores, with roughly 50 percent of the countries falling in the lowest score bracket (von Haldenwang et al., 2023).

This lack of transparency makes the scrutiny of TE policy including (but not only) by parliaments very difficult, if not simply impossible. Moreover, and besides exceptions such as the United States, data on TEs implemented by subnational governments is stunningly poor (Villela et al. 2010 and Redonda and Neubig, 2018).[1]

In addition to its role in the set-up (design, approval, modification) of TEs, parliaments should also actively participate in the monitoring and evaluation of TE provisions. In some jurisdictions, parliaments are directly or indirectly involved in that process for specific TEs. The TE reports by the Joint Committee on Taxation of the US Congress as well as the analyses on TEs provided by the US Congressional Budget Office (CBO) are cases in point. The recent inquiry into TEs by the UK House of Commons Treasury Committee provides further illustration – highlighting the complexity that TEs add to the tax system and calling on the government to systematically review existing tax reliefs, publish their full costings, and conduct 5-year reviews of individual provisions (House of Commons, 2023).

Globally, at the very least, evaluation frameworks should ensure that TE evaluations (or at least their results and main takeaways) are fed back into the policy making process (e.g. through a mechanism that defines specific deadlines to share evaluation results with parliaments). Yet, again, the reality often does not hold up to that benchmark. Indeed, the GTETI’s Dimension 5. TE Assessment is the one performing the lowest (the global average being 6.2 out of a maximum of 20 points), showing that TE evaluation is an area where even best performing countries are lagging way behind minimum standards.[2]

Given the importance of the role of parliaments when it comes to TE policy making and, at the same time, the little recognition of this role, CEP is hereby launching a blog series to shed further light on this critical aspect of tax policy.

The series will bring together perspectives from a variety of contributors with firsthand views on the field and with a focus on the role of (and, in some cases, their interactions with) parliaments. The contributors will include a wide range of profiles (policy makers, academics, members of parliament as well as experts in the TE field) and cover different contexts (TE policy implemented at the supranational, national and subnational levels in low-, middle, as well as high-income jurisdictions).

We are delighted to have Rocus van Opstal, the former Deputy Director of the Fiscal Policy Division at the Dutch Ministry of Finance, publish the first piece in the series discussing the case of the Netherlands.

We will be posting further pieces on an ongoing basis. Please stay tuned and enjoy the read!

 

[1] A repository of state TE reports is available on the Institute on Taxation and Economic Policy (ITEP) website.

[2] Dimension 5 assesses TEs not only in terms of the level of disaggregation of the revenue forgone estimates, but also with respect to their evaluation, which is key to identify which TEs provide “value for money” and which ones are not effective or even trigger negative externalities that should be taken into account (Redonda et al., 2023).

 

References 

  • Economic Commission for Latin America and the Caribbean (ECLAC)/Oxfam International (2020). Tax Incentives for Businesses in Latin America and the Caribbean. Summary, Project Documents (LC/TS.2020/19), Santiago. 
  • Grote, M. (2017). How to Establish a Tax Policy Unit. Fiscal Affairs Department How To Notes 2017-005. Washington, DC: IMF. 
  • House of Commons (2023). Tax Reliefs. Twentieth Report of Session 2022–23, House of Commons Treasury Committee. 
  • Redonda, A., von Haldenwang, C., & Aliu, F. (2023), Global Tax Expenditures Database [data set], Version 1.2.1 Available Online: https://doi.org/10.5281/zenodo.7825791 [Accessed 18 October 2023].
  • Redonda, A., Millan, L, von Haldenwang, C., & Aliu, F. (2023), The Global Tax Expenditures Transparency Index (GTETI). Companion Paper. German Institute of Development and Sustainability (IDOS), https://doi.org/10.23661/r3.2023
  • Redonda, A. & Neubig, T. (2018). Assessing Tax Expenditure Reporting in G20 and OECD, CEP Discussion Note 2018/3, Council on Economic Policies (CEP).
  • Villela, L., Lemgruber, A. & Jorrat, M. (2010). Tax Expenditure Budgets, Concepts and Challenges for Implementation, IDB Working Paper Series No. 131, Inter-American Development Bank (IDB), Washington DC. 
  • Von Haldenwang, C., Redonda, A., & Aliu, F. (Eds.). (2023). Tax Expenditures in an Era of Transformative Change. GTED Flagship Report 2023. German Institute of Development and Sustainability (IDOS), https://doi.org/10.23661/r2.2023 

 

Related Posts

Rationalizing the Use of Tax Expenditures – The Role of Parliamentarians

 | 31 January 2024
Fiscal, Blog | Tags: Parliaments, Tax Expenditures
The role of parliaments is vital with regard to the monitoring and control of tax expenditures, both as part of the regular budget cycle and ad hoc, if required.... continue reading

Increasing Transparency on Tax Expenditures in Germany

, and | 8 August 2023
Fiscal, Blog | Tags: Germany, Tax Expenditures
As in many other countries, the use of public resources to grant beneficial tax treatments (or tax expenditures) is less well reported and scrutinized in Germany than direct spending. ... continue reading

Tax Expenditure Scrutiny Can End Trillion-Dollar Political Game

, and | 19 January 2023
Fiscal, Op-Eds | Tags: Income Tax, Inequality, Tax Expenditures, United States
Too often, government spending is understood only as cash payments to specific individuals or groups. However, targeted exemptions or reductions in taxes owed strain public coffers similarly to direct spending,... continue reading

Assessing Tax Expenditure Reporting in G20 and OECD Economies

 and | 6 November 2018
Fiscal, Discussion Notes | Tags: G20, OECD, Tax Expenditures
Governments worldwide pursue public policy objectives through direct spending and tax expenditures (TEs). Interestingly though, and despite their significant impact on government budgets, TEs are opaque and very often not... continue reading