New research shows tax expenditures can make taxation more exclusionary and less transparent.
In the worldwide debate on domestic revenue mobilisation, one frequently overlooked factor are tax expenditures. They are preferential tax treatments that governments grant to specific groups, sectors or regions with the aim to promote investment, fight poverty or support the transition to low-carbon technologies, among many other goals. Tax expenditures are often criticised as being costly, ineffective or even harmful, but removing them can be quite difficult, due to the manyfold political interests attached to them and missing information regarding their true impact. Having more and better insights into the workings of tax expenditures and the political economy surrounding their reform is crucial for policymakers and other stakeholders.
Since 2023, our German-French cooperation project TEFISCON (Tax Expenditures and the Fiscal Contract) contributes to closing this critical knowledge gap. It is financed by the German Research Foundation (DFG) and its French counterpart, the Agence Nationale de la Recherche (ANR). Jointly with local research centres and universities, we conducted business and household surveys in Colombia, Morocco and Uganda with the aim to find out how the use of tax expenditures affects the relationship between taxpayers and the state.
Preliminary findings were now presented at the final conference of the project, which took place in Clermont-Ferrand (France) on 8-9 September. These findings indicate that non-beneficiaries of tax expenditures have a more critical view on the fairness and complexity of taxation, while at the same time beneficiaries tend to have a closer relationship with the tax authority. In an area hardly researched so far, our project shows that tax expenditures affect the fiscal contract in many ways, often by making it more exclusionary and less transparent.
