Cost-Benefit Analysis of Tax Expenditures and other Revenue Measures
We discussed how assessment of the tax incentives and other tax expenditures in the region based on their economic usefulness in increasing social welfare would support efforts in reforming the tax system and improving tax revenues. Many countries are in need of rationalizing their system of tax incentives and scaling back other tax expenditures, but lack the analytical and other tools. The workshop on tax expenditure assessment followed up the 2017 workshop on revenue forecasting and tax policy analysis.
Tax expenditures (TEs) are used by governments around the world to promote public policy objectives and they are designed to promote economic growth and support income maintenance. TEs are offered in many shapes across the entire tax system. They provide subsidies through reduced tax rates, tax exemptions, exclusions, deductions and tax credits. Tax expenditures in the form of tax incentives are extensive and increasing in the region. Cost effectiveness of revenues forgone is measured in terms of economic benefits relative to the indirect subsidy provided by the tax system. The cost-benefit analysis would allow for comparison of the opportunity cost of forgoing tax revenues which could be directed towards alternative uses of public funds beneficial to the society.
How we have benefited
By the end of the workshop we have:
- Understood the role of a benchmark for each type of tax. Once the benchmark tax system is determined and tax expenditures in terms of revenues forgone are estimated, their economic usefulness can be determined using a CBA framework
- Discussed the analytical structure in place to enable an assessment of the economic benefits of such concessions
- Evaluated the effects of tax-benefit policy reforms and other changes on poverty, inequality, incentives and government budgets by calculating the effects of actual policies
- Used such analysis to facilitate the preparation of periodic TE budget
What we have learned
We have addressed the following areas:
- Advantages and potential adverse effects of TEs
- Reporting, measurement and review of TEs
- Integration into the budget process
- Estimates of tax revenues forgone, and their effect on effective tax rates by type of taxpayers, sector and size of income can be best established using microsimulation models.
- EUROMOD, a tax-benefit microsimulation model for EU that enables researchers and policy analysts to calculate, in a comparable manner, the effects of taxes and benefits on household incomes and work incentives
- MIMOSI, a Dutch microsimulation model for personal income tax
Participants were actively engaged in discussions and group exercises, and encouraged to share their experiences and country practices.
The workshop was designed for the officials in ministries of finance and tax administrations who are involved in tax expenditure analysis.
No fee was charged for officials working in the public sector. Travel and accommodation costs for up to two participants from Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Macedonia, Moldova, Montenegro, Romania and Ukraine was covered by the Ministry of Finance of the Netherlands. The costs of travel and accommodation of the self-funded candidates from the SEE region (and beyond) were covered by the participants / sponsoring institutions. Meals and refreshments were provided during the event.
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Justin Runherd, Policy Advisor at the General Tax Policy Division / Analysis Department, Ministry of Finance of the Netherlands
After finishing his masters in Economics of Public Policy and Management, Justin started working as a policy advisor at the Ministry of Finance of the Netherlands. He coordinates the monitoring and reporting of Dutch tax expenditures in the Budget Memorandum. He also coordinates the program of evaluations of tax expenditures. Passionate about improving the tax system, he has contributed to several evaluations concerning tax expenditures. This incorporates measuring and analyzing the effects and costs of the tax expenditure. Justin’s fields of expertise include the VAT, payroll taxes on allowances and benefits in kind, and tax deductions for environmentally friendly investments.
Rocus van Opstal, Head of the Analysis Department, General Tax Policy Division, Ministry of Finance of the Netherlands
Rocus studied Econometrics at Erasmus University Rotterdam. After his study he worked more than 20 years at CPB Netherlands Bureau of Economic Policy Analysis in different fields. Among others: labor market economics, macroeconomic modeling, income distribution and economic and budgetary forecasting and policy analysis. The last 10 years he worked at the Financial and Economic Policy Department of the Ministry of Finance, which advises the Minister on economic and budgetary policy. At the moment he is head of the Analysis Department at the General Tax Policy Division. The Analysis Department is responsible for the calculation of budgetary effects of tax proposals and for monitoring and evaluating tax expenditures.
Francesco Figari, Associate Professor of Public Finance, University of Insubria, Italy
Francesco is also a Research Fellow of CeRP, Center for Research on Pensions and Welfare Policies at the Collegio Carlo Alberto. Previously he has been Research Fellow at ISER University of Essex where currently he is Research Associate. He holds a Master in Public Economics from the University of York and a PhD in Economics from the University of Essex. He has been involved with the development of EUROMOD, the EU-wide tax-benefit model, since 2006, with particular interest on labor supply modelling. His research focuses on the analysis of the redistributive effects of public policies, the behavioral impacts of policy changes, the determinants of multiple deprivation and, more recently, the welfare resilience to the economic crisis across Europe.
He acts regularly as a consultant for the European Commission DG-EMPL, JRC, OECD, United Nation, and World Bank Institute. He has published in the fields of poverty, taxation and European welfare systems in international journals such as Oxford Economics Papers, Fiscal Studies, Journal of Economic Inequality, Review of Income and Wealth, Journal of Social Policy, Journal of European Social Policy.
“The design of fiscal consolidation measures in the European Union: distributional effects and implications for macroeconomic recovery”, with A. Paulus and H. Sutherland, 2017, Oxford Economic Papers, 69 (3): 632-654.
“Fiscal consolidation policies in the context of Italy’s two recessions”, with C. Fiorio, 2015, Fiscal Studies 36(4): 499-526.
“Welfare compensation for unemployment in the Great Recession“, with M. Fernandez Salgado, H. Sutherland and A. Tumino, 2014, Review of Income and Wealth 60, S177-S204.
“Cross-national differences in determinants of multiple deprivation in Europe”, ISER WP 2009/34, The Journal of Economic Inequality 10(3), 2012.
- Application of microsimulation models in the analysis of taxes and social benefits in Croatia, Ivica Urban, Institute of Public Finance, Zagreb
- Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment, a report to the G-20 Development Working Group by the IMF, OECD, UN and World Bank
- Shedding Light on Hidden Government Spending: Tax Expenditures, Tom Neubig and Agustin Redonda, Public Financial Management Blog, International Monetary Fund
- The fiscal and equity impact of tax expenditures in the European Union, Salvador Barrios, Francesco Figari, Luca Gandullia and Sara Riscado, Joint Research Centre (JRC), the European Commission
This learning initiative was supported by: