23/10/2013 : The use of tax expenditures in times of fiscal consolidation

Against the background of recovering growth and remaining fiscal consolidation needs, reforming tax expenditures may offer a promising avenue to raise revenue and, at the same time, improve efficiency of the tax systems. The workshop addressed the economic and budgetary aspects of tax expenditures, including reporting practices, and discussed the rationale for business tax incentives and the distributional effects of tax reliefs in personal income taxation.

The workshop included speakers from academia, national authorities and international organisations (Commission and OECD). The conference was organised in two sessions: "Tax expenditures: measurement and macroeconomic implications" and "Tax expenditures in direct taxation", followed by a general panel discussion.

Marco Buti, Director-General of the Commission's DG ECFIN, in his introductory statement recalled that tax reforms ranked high in the European policy agenda. According to a recent Eurobarometer poll, public opinion sees tax policy as a major area for reforms in the EU. He referred to the need for refocusing attention on the tax side of the budget with the aim of improving the surveillance framework. He also pointed out that reforming tax expenditures could have substantial impact on Member States' budgets.

Gilles Mourre, Head of the tax policy unit in DG ECFIN, presented the relevant key messages developed in the recently published Commission report "Tax reforms in EU Member States 2013". In the wider context of the report, he highlighted the importance of reforms aimed at broadening the relevant tax bases rather than at increasing tax rates.

The session on the measurement and macroeconomic implications covered different aspects. Some of the main issues discussed included i) challenges in measurement and cross-country comparison of tax expenditures, ii) the occurrence of a fiscal illusion related to the use of such reliefs, potentially leading to a distortion in policy makers' behaviour, iii) the importance of clear reporting and iv) the need for taking behavioural responses into account when estimating the revenue impacts of tax expenditures. Reporting practices and measurement issues were illustrated by the Swedish experience.

The thematic session on tax expenditures in direct taxation discussed critically different business tax incentives, such as allowance for corporate equity, tax reliefs for SMEs, accelerated depreciation, R&D tax reliefs. In the context of integrated capital markets, it was pointed out that such measures had to be seen as part of international tax competition between locations, potentially creating new inefficiencies. Moving to tax reliefs in the personal income tax system, results from a microsimulation model for Europe gave insights on the distributional effects of tax allowances and tax credits in place in six European countries. A more detailed review of tax expenditures in France followed.

The concluding policy panel discussion recalled the complexity of the concept of tax expenditures and advocated more transparency in the use of such reliefs. The common view emerged that the threshold of evidence for justifying a new tax expenditure should be high, and that a thorough cost-benefit analysis is needed in any case. In assessing and reviewing tax breaks, a more thematic approach focusing on specific types of tax expenditures or relevant grouping was recognised as a promising avenue.