Debate and criticism
Aspects of the tax expenditure concept have been contentious. The ideal tax system has been the focus of this debate. However, if TEs are measured relative to a clear alternative tax treatment, normative statements are reduced. The residual debate usually relates to judgement calls around the TE definition's boundary (Kahn and Lehman, 1992).
| Objection | Response |
|---|---|
| Tax expenditures are hard to estimate. | There are issues with valuations in all fields. For instance, many assets on the Crown balance sheet (ie, the Treaty of Waitangi or national parks) are unique, have no active market, and could never be sold. |
| TE estimates based on revenue forgone ignore behavioural effects. | Fiscal reporting accounts for the cost of a policy in isolation from other policies. Behavioural responses to discontinued social spending programmes, such as a transfer to another benefit, are not included in reported figures for direct spending. |
| The TE concept implies the government owns all taxpayers' income. | The current rate structure, which claims a limited proportion of income, defines the government's current claim on income. Tax expenditures act to reduce not enhance that claim. |
| The TE concept is pejorative. It implies that the identified provision should be removed. | Reporting the cost of direct expenditures in financial statements does not suggest they should be removed. TEs have budgetary implications, but there is no reason why bringing reporting for tax expenditures on par with direct spending should suggest that that the policy is ineffective or should be removed. |
| TEs are a back door to tax reform. | TEs are more closely associated with a spending review. A descriptive evaluation of the cost of direct or indirect expenditures makes no statement about whether the spending represents value for money. |
| TEs reporting aims to lower the tax rate and reduce the size of the state. | TE reporting provides the public with financial information without judgement. |
Notes
- [10]This table is derived from Brooks (2009) which discusses the main objections to TE reporting.
