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1) The budget accounting problem

The USA 1974 Budget Act defines “Tax expenditure” to “those revenue losses attributable to provisions of the Federal tax law which allow a special exclusion, exemption or deduction from gross income or which provide a special credit, a preferential rate of tax or a deferral of tax liability”. Though this clear definition, the practice or use of the concept arises some important methodological problems.

1º) in order to identify the special exclusion or special deduction it should be first necessary to define certain basic tax structure (the benchmark or “the baseline tax structure”). And here different approaches or criteria appear. For example, if the VAT law does not levy investments, should this exclusion be computed as tax expenditure? It depends of how VAT is defined in the baseline system. If VAT is defined as a “Consumption VAT”, that exclusion should not be considered as tax expenditure. On the other hand, if some activity is exempt or levied with a preferential rate, it should be. But, in those activities not levied by the general rate like food or pharmacy (drugs), the revenue lost by tax rate differentials is really tax expenditure?

Other cases, some of them cited by Ladd as the one corresponding to the state of Minnesota where 60 categories are contemplated in the Real Estate Tax, the problem is how should defined the normal case of those 60 categories. In case of the Income Tax, the exclusion of capital earnings from the tax base should be considered tax expenditure? The economic benefit of using own housing should be computed as tax expenditure? The adoption of the standard Haig-Simon criterion – comprehensive approach for the Income Tax – has not been the one adopted in most countries. For example, the Treasure of USA certainly did not adopt it, and the benchmark in such a case like also in Argentina is referred to the Income Tax as usually is legislated in both countries, computing only the monetary flows perceived by the exercise of a permanent activity, not levying capital earnings, and computing as tax expenditure certain special exclusions contemplated in the tax law. But criteria followed by federal and state governments are not always similar; Ladd cites that the list of tax expenditure of the states in USA varies between 150 and 300 articles. The Federal Government contemplates 135 articles.

This is the most important technical challenge to the concept: to define the baseline tax system (the benchmark) on which to define what is tax expenditure to compute the differences or the apartments of the specific tax legislation.

2º) A technical problem arise when trying “to add” estimations of singular tax expenditures to estimate the total tax expenditure, for categories or general. To know or estimate which revenue had been lost by the government due to certain tax expenditure decision is not a simple task, because either previous data on revenue linked to the article do not exist - being the rest invariable - or many things have changed (changes in other articles of the tax in question, other policy measures and the economic scenario) influencing each other in their effects.

Revenue loss estimations will also be influenced by changes in marginal tax rates, changes in the economy, or growths in costs of certain services (as health in USA, for example). A modification in a tax law can also influences the revenue of other taxes, through modifying economic incentives of the affected sectors linked each other according to industrial interrelations. Naturally, each of those indirect effects depends on the pertinent crossed price-elasticity of demand and supply between goods. So, although the

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