Two recent reports discuss the benefits of increased and more in-depth analysis of tax expenditures: government spending done through lower tax rates, credits, deductions, exemptions and deferrals.
The Swiss-based Council on Economic Policies blog, which I co-wrote, discusses the importance of tax expenditure reviews as part of the United Nations’ Sustainable Development Goals. While important for developing countries, even OECD/G20 countries fall well short of transparency and evaluation benchmarks. See link.
The Urban Institute released a study describing the minimal analysis of tax expenditures and suggesting some options to enhance the evaluation of effectiveness of US tax expenditures. See link.
Although some people cite conceptual and measurement issues as reasons not to undertake more analysis of tax expenditures, some key institutional best practices could provide more empirical-based analytics of the effectiveness of these government subsidy programs.
To paraphrase Rodney Dangerfield, tax expenditure analysis gets no respect.
As an example of no respect, a bill sponsored by Ways and Means Committee ranking member Sander Levin, in the “American Jobs and Closing Tax Loopholes Act of 2010”, called for systematic study of tax expenditures. The provision required the Chief of Staff of the Joint Committee on Taxation, in consultation with the Comptroller General, to submit to the House Ways and Means Committee and the Senate Finance Committee a report on each tax expenditure. Reports for each tax expenditure “are to be submitted first, in order from those with the least aggregate cost to the greatest aggregate cost.” See link, page 123.
The legislation had the right idea for information and analysis of tax expenditures, but meaningful analysis of the largest tax expenditures would be like waiting for Godot. “Such reports shall contain the following: (1) an explanation of the tax expenditure and any relevant economic, social, or other context under which it was first enacted; (2) a description of the intended purpose of the tax expenditure; (3) an analysis of the overall success of the tax expenditure in achieving such purpose, and evidence supporting such analysis; (4) an analysis of the extent to which further extending the tax expenditure, or making it permanent, would contribute to achieving such purpose; (5) a description of the direct and indirect beneficiaries of the tax expenditure, including identifying any unintended beneficiaries; (6) an analysis of whether the tax expenditure is the most cost-effective method for achieving the purpose for which it was intended, and a description of any more cost-effective methods through which such purpose could be accomplished; (7) a description of any unintended effects of the tax expenditure that are useful in understanding the tax expenditure’s overall value; (8) an analysis of how the tax expenditure could be modified to better achieve its original purpose; (9) a brief description of any interactions (actual or potential) with other tax expenditures or direct spending programs in the same or related budget function worthy of further study; and (10) a description of any unavailable information the staff of the Joint Committee on Taxation may need to complete a more thorough examination and analysis of the tax expenditure, and what must be done to make such information available.”
As countries face increasing fiscal deficits and pressing social needs, hopefully increased focus on the effectiveness of tax expenditures will get more attention and respect. Expect more studies like these to start focusing on the importance of evaluating tax expenditures.