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

2. 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.

3. 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

4. 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

5. What is the potential contribution from rationalizing tax expenditure programs?

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. Who stands to lose? The most compelling evidence

14. 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

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

16. 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