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definition of tax expenditure is clear, its application leaves wide margins of computation to estimate its economic impact, which should at least be analyzed through a Computable General Equilibrium model36.

2) The use of the concept as budget control

To measure a tax not collected has obvious difficulties, but for what reason its calculation is it needed? In a representative democracy, when taxpayers pay their taxes is politically important for constituency to know what does government do with that money. This control objective has been essential in the designs of public budget accounting systems and control reports of budget execution. But if a tax exemption avoids taxpayer paying a tax there is no money to trace out; that is, no public expenditure to control; therefore, on behalf of constituency there is nothing to control relative to the destination of their funds.

Now, if the objective of the budgetary accounting is wider and includes the function of documenting the impact of public sector in the economy, and on this aspect in particular the effect of different public policies equivalent to explicit fiscal decisions, then to compute tax expenditures is as important as any budget expenditure destined to specific programs. Tax expenditure could be considered a specific program that registers the subsidy directed to the activity or taxpayer who was exempted from taxation.

The point has modern gravitation because as it was explained at the beginning, older division between expenditure and taxes (expenditures basically linked to the provision of public or mixed goods through the purchase of goods and services), is no more so clear. With budgets containing important amounts of “transfers” (negative taxes), higher than purchases of goods and services, many categorical programs focused toward certain segments of society, and “tax expenditures”, such division becomes confused or weak.

Therefore, the enormous symmetry of many transfer systems and taxation pursuing distributive or redistributive objectives, clamors for a combined treatment of both policies, demanding governments to inform constituency in the same way. On this line of suggestions about budget control, according to Ladd, the following four categories should be contemplated:

  • (1)

    The tax revenue collection.

  • (2)

    The purchase of goods and services.

  • (3)

    The pecuniary transfers and the provision of merit goods, with redistributive aims.

  • (4)

    The provision of economic incentives that modify relative prices.

Categories (3) and (4) should include direct expenditures and tax expenditures; so tax expenditure could be divided into those two categories and they could be assimilated to programs of direct expenditures in both areas.

However, some problems of interpretation could arise here. For example, should a subsidy to the industry be computed as an incentive to maintain the activity and employment levels in the industry or as a direct transfer to industrial owners?


See Cicowiez y Di Gresia (2004) for technical explanations and papers’ references (in Spanish).

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