Reforming Tax Expenditure Programs: a view from the trenches Carlos B. Cavalcanti Feb. 5 2003 QFA BBL version

Outline Brief description of two country cases When reforming tax expenditure programs, which factors should be considered? Measuring tax expenditure programs Making the technical case for reform Building a political coalition for reform Bottom line: reforming tax expenditure programs is battle worth fighting in exchange for lower and uniform tax rates.

The case of Poland Government wanted to reduce tax rate, making them more uniform but was concerned about revenue loss Curtailing tax expenditure programs provided the opportunity to broaden the tax base, opening scope for an across the board tax rate cut

The case for Argentina Government is facing a severe fiscal crisis, requiring a combination of increased tax revenues and lower expenditures Again, reforming tax expenditure programs provides an opportunity to broaden the tax base and raise tax revenues without a wholesale reform in the tax legislation

What is the potential contribution from rationalizing tax expenditure programs?

Moving ahead with reforming tax expenditure programs Measuring the size of tax expenditure programs Making the technical case for reform Recognizing the political dimension of reforming tax expenditure programs

Measuring Tax Expenditure Programs Historical estimates based on tax payers returns or by using a representative sample of tax returns Projections built from tax models or relating tax expenditure programs to explanatory economic values (e.g., interest rates, household income) Aggregation of tax expenditure estimates

Promoting private decision making Requiring less government oversight Making the case for reform: what are the benefits of tax expenditure programs? Encouraging private sector participation in social programs (e.g., tax deduction for charitable contributions) Promoting private decision making Requiring less government oversight

Narrowing the tax base, and making tax rates more regressive Making the case for reform: what are the drawbacks of tax expenditure programs? Narrowing the tax base, and making tax rates more regressive Complicating the tax code, increasing the costs of tax compliance and of payment enforcement

Making the case for reform: what are the drawbacks of tax expenditure programs? Paying individuals for activities they would undertake anyway, generating no additionality Making government expenditure more regressive by excluding non-tax payers Making government programs less transparent, keeping them further away from public scrutiny

Making the case for reform: what are the drawbacks of tax expenditure programs?

Special interest groups (e.g., housing construction industry) The political economy of reforming tax expenditure programs: who stands to lose? Special interest groups (e.g., housing construction industry) Some higher income tax payers, who would lose tax exemptions

Who stands to lose? The most compelling evidence

Reforming tax expenditure programs: who stands to benefit? Direct expenditure programs, since reductions in tax expenditures usually require increases in direct expenditures, although not in a one-to-one proportion Lower income tax payers, since reducing tax expenditures may open scope for reducing overall tax rates Tax administration, since tax laws become simpler and easier to enforce

The real trade-off: comparing tax expenditure programs with tax rates

Building a coalition Measuring the size and distribution of tax expenditure programs, so as to identify winners and losers Measuring the net fiscal impact, so as to have the Ministry of Finance on board Examine the trade off between fewer tax programs and lower tax rates