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Controversial aspects of determination of tax expenditures in the system of indirect taxation
Abstract
Identification of elements of benchmark tax system (indirect taxes benchmark) and tax expenditures is a necessary prerequisite for the implementation of the concept of the tax expenditures in the budget process. Their identification is complicated by the lack of a generally accepted conceptual model of the tax benchmark and, consequently, – generally accepted criteria for qualifying a particular provision of tax legislation as an element of such benchmark or tax expenditures. Given the above, the application of the concept of tax expenditures to the analysis of indirect taxes is determined as the purpose of the article. To achieve this goal, the most controversial aspects of the concept of tax expenditures are considered: the problems of their identification and measurement, as well as the contradictory consequences of its implementation. Peculiarities of application of the concept to the study of tax reliefs for indirect taxes – universal and specific excises are analyzed. The main elements of the benchmark for the VAT and deviations from it are identified, on the identification of which there are both consensus and disagreement among scientists and practitioners from different countries. The existing approaches to the qualification of reduced VAT rates and exemptions from payment in the public interest in the EU member states and other countries are analyzed, arguments in favor of their identification are proposed, taking into account the harmonization of this tax. The existing conceptual approaches to the identification of elements of the benchmark and tax expenditures of the least studied in this context specific excises and the peculiarities of their application in different countries are outlined. The definition of the main elements of the benchmark and tax expenditures of harmonized excise taxes is argued. Based on the analysis of the reports of the State Tax Service of Ukraine on tax reliefs, that are losses of budget revenues, and other tax reliefs, the main elements of the benchmark and tax expenditures for VAT and excise tax in Ukraine are highlighted. Regarding the latter, such elements are defined for all excisable goods, as well as for some of their groups – alcoholic beverages, tobacco products and energy products. It is established that in Ukraine the composition of the elements of the benchmark and tax expenditures of excise tax on alcoholic beverages and tobacco products can be justified according to the directions of their use, which create or do not create negative externalities, while for excise tax on energy products the theory of optimal taxation should be also taken into account . Common problems in the distribution of VAT and excise tax reliefs between the report on tax reliefs, that are losses of budget revenues, and the report on other tax reliefs have been identified. It is established that such problems are caused by the uncertainty of the Ukrainian methodological basis for identifying elements of the benchmark tax system and tax expenditures by providing information on budget losses from the use of tax reliefs without publishing the methodology of their measurement and definition in normative documents of the specified categories (basic notions of the concept of tax expenditures).
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The proliferation of exempt supplies in VAT systems, particularly the traditional European VAT, undermines the integrity of the tax in many respects. Exempt supplies bear a tax burden equal to the input tax imposed along the supply chain up to the exempt supply. This leads to overtaxation of business customers and undertaxation of final consumers. The neutrality of a benchmark VAT is replaced by economically inefficient biases and distortions. Unclear borderlines between exempt and taxable supplies increase compliance costs and administration costs. This paper reviews the types of exempt supplies that fall into two broad categories -- merit or concessional exemptions such as those for education or health services, designed to reduce taxation to achieve social benefits, and those adopted for technical reasons including exemptions for immovable property and financial supplies. It explains the origins of the exemptions and explores reform options to bring exempt supplies within the ordinary system of taxable supplies with full input tax recovery for businesses.
This paper reviews the economics of taxation. It falls into three parts. The first part examines the rationale of excise taxation by reference to the non-revenue objectives that are pursued through the imposition of the various duties. The second part discusses the instruments that can be applied, i.e. duties, regulations and permits. The third part reviews some issues - discrimination, coordination and earmarking - that often arise in connection with excise taxation.
In its fiscal 2002 budget, the Bush administration criticized the presentation of tax expenditures. In this article, Bartlett argues that the tax expenditures concept deserves serious criticism. It is based on the notion that there is some generally accepted "normal" tax system against which to judge deviations from it. In fact, there is no such agreement. Reputable tax experts disagree strenuously on questions of what provisions either belong or do not belong in a normal tax structure. Therefore, the tax expenditures list is essentially arbitrary. But because it still embodies the biases of those who first developed the concept, there are normative consequences to the very existence of a tax expenditures budget. In particular, the underlying acceptance of income, rather than consumption, as the reference tax base sanctions the excessive taxation of capital.Bartlett also raises technical questions about the measurement of tax expenditures and the lack of consistency in the listing of certain provisions, while leaving out others. He concludes that the Bush administration is on the right track and suggests that in attacking the tax expenditures concept, it may be laying the intellectual groundwork for a tax reform proposal that would shift the tax code more toward a consumption base.IRET is a nonprofit tax-exempt 501(c)(3) economic policy research and education organization devoted to informing the public about policies that will promote economic growth and efficient operation of the market economy.
Tax expenditures are an instrument frequently used when a government wishes to achieve certain economic and social effects. But because of the increasing number and scope of tax expenditures, their proper use, quality of administration and record-keeping have become a major challenge for the tax authorities and the whole of the government. The article considers and explains very diverse forms of tax expenditure such as reliefs, tax deductions, tax allowances, tax exceptions and special rates of taxation and the ways in which they are defined and calculated. The key problems in the analysis are the absence of a single definition and of methodology for the calculations; these ultimately make it impossible to compare tax expenditures between or among countries.
Estimating the revenue cost of tax expenditures and understanding their role in revenue-based fiscal adjustments is one of the most important elements of macroeconomic management, which is likely to take center stage in the debate on how developing countries can mobilize domestic revenues for attaining their sustainable development goals. The quality of policy outcomes hinges on the quality of tax expenditure reporting at the country level, which in turn largely determines their credibility as an analytical tool for policy making. We examine tax expenditures reports of 26 developing and transition countries, and assess whether they reflect good practices, defined according to several key dimensions. Although such reporting has gained momentum in the past decade in developing countries, its quality remains weak in several areas. For example, only about fifty percent of the countries surveyed describe in some detail their benchmark tax system. All countries (except Uruguay) do not include the time frame of tax expenditures (as permanent or temporary). The publication of tax expenditures reports is a legal requirement in only eighteen countries. And many reports are incomplete in their coverage of the tax system and reporting dimensions. Developing countries should improve the quality and comprehensiveness of their reports to gain credibility in developing robust domestic revenue mobilization strategies. Otherwise, these reports are likely to become voluminous and opaque documents, with little benefit to the larger public. Finally, we find that differences in methodology, data and reporting on the cost estimates of tax expenditures across countries are important enough to make crosscountry comparisons problematic, perhaps even misleading.
Proponents of tax expenditure analysis have insisted that when tax programs are economically equivalent to direct spending programs, they should be treated as legally equivalent. While agreeing that tax expenditure analysis is a tool of immense importance and usefulness to legislatures, this article argues that courts should be wary about adopting that analysis into constitutional adjudication. It analyzes the problems of legalizing tax expenditure analysis by exploring the definitional problems inherent in defining the tax base, the political manipulability of the tax expenditure budget, the dangers of constitutionalizing the definition of income, and the theoretical challenges presented by the hybrid income-consumption tax that currently exists in the Internal Revenue Code. The article argues that the policies reflected in different constitutional provisions should determine whether tax expenditures and their economically equivalent direct-expenditure counterparts should be legal equivalents. Applying that approach to the equal protection and establishment clauses of the Constitution, it concludes that the allowance of economic benefits is not of central importance under either of those provisions, other interests that are important under those provisions may be better served by either providing a government benefit directly or through the tax system, and tax expenditure analysis has little to offer in the review of tax benefits under those constitutional provisions. By analyzing the charitable contribution deduction in light of equal protection and establishment clause doctrine, the article concludes that tax-based aid to private organizations could be constitutional even where equivalent direct spending programs would not.
This paper reports the work that has been done by the OECD Secretariat on the project on off-budget and tax expenditures. The paper makes use of information that was provided at an expert meeting held in Paris in February 2004.
We examine the measurement of tax expenditures, as well as review issues concerning the classification of tax expenditures generally. We use calculations from NBER's TAXSIM to illustrate some of the problems with the current methodology for estimating tax expenditures. Unlike most previous work on the topic, we focus on how features of the current tax system including the alternative minimum tax and sunset rules complicate and compromise the value of information provided by the tax expenditure budget.
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