Approach two: defining tax expenditures directly
A few countries are starting to define TEs directly rather than indirectly through a benchmark[9]. Japan and Korea do not specify a benchmark and instead define TEs as a deviation from certain principles (OECD, 1996). In the US the JCT and the Treasury have also chosen to define some TEs directly.
TEs under the US approach are defined as an exception from a current tax law. The advantage of this approach is that the remaining body of tax law becomes a residual factor, rather than the focus of analysis. This reduces the normative implications associated with specification of an alternative tax treatment where no clear exception exists.
The US still reports a range of other TEs, but these estimates are clearly separated within their TE statement. The US Treasury and the JCT's definition now specifies that a TE must:
- be special in that it applies to a narrow class of transactions or taxpayers; and
- have a general tax provision to which the special provision is a clear exception.
The JCT adds an extra stipulation that the feature must also decrease revenue. The US Treasury has also accepted a spending leg to its definition that specifies that TEs should be able to be replaced by a direct spending programme (GAO, 2008).
Regardless of the definition, an element of judgement will still be required, although the basis for decisions may be much clearer. The JCT noted that their direct definition does not require the kinds of normative judgements that go into the construction of a “normal” tax benchmark, but that it is nonetheless not automatic in application (JCT 2008: 40).
The key advantages of a direct definition over a benchmark-based approach are transparency and relative objectivity. It is much easier to communicate a concise tax expenditure definition than it is to communicate an entire benchmark tax system.
However, depending on the structure of the tax system, direct definition comes with some disadvantages. Direct definition may miss large cross-cutting TEs that apply to all members of the population, but are still heavily policy motivated. For instance the universal subsidies provided under the Australian Superannuation Guarantee (ASG) that are motivated by superannuation and savings policy would not be picked up under the US definition as all taxpayers pay the same rate of tax on ASG accounts. A benchmark that specifies a desirable level of tax is needed to report and estimate the cost of these cross-cutting TEs.
Notes
- [9]Defining TEs directly may still implicitly use a benchmark. However, using the US conservative requirement that TEs have a clear alternative tax treatment removes the need for a benchmark. The alternative tax treatment is localised removing the need to focus on the wider structure of the tax system.
