Effectiveness and Economic Impact of Tax Incentives in the SADC ...

4-10 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
4.2 Budget Impact—Monitoring “Tax Expenditures”
Any waiver or reduction of a standard tax obligation is, in essence, a use of government funds
and a form of government assistance to the beneficiary. Because tax preferences are analogous
to direct budgetary funding, they are commonly known as tax expenditures. This category
includes most investment tax incentives, as well as tax preferences for other economic and
social policy purposes such as the promotion of home ownership, charitable donations,
medical plans for employees, and child care. In principal, governments should be just as
accountable for tax preferences as they are for ordinary government expenditures. To this
end, tax expenditures should be reported along with the annual budget presentations.
The United States and Germany were the first countries to introduce regular reports on tax
expenditures, in the late 1960s. The practice spread among OECD countries, but it is still a
rarity in developing countries. Brazil is one exception, and South Africa is developing a tax
expenditure budget. That very few countries report systematically on tax expenditures
suggests that the exercise is not entirely straightforward. Should it be a norm for SADC
countries to report on tax expenditures, particularly for investment tax incentives? Let us see
what is involved.
The concept of “tax expenditure” can be defined in various ways, 54 but the key element is that
tax expenditures are foregone revenues due to provisions of the tax code that deviate from the
normal tax structure. Most definitions add that the provisions are intended to influence
private decisions or provide benefits to designated groups. Operationally, tax expenditures
are usually estimated from tax return data by computing the difference between the actual tax
liability for each taxpayer, and what would have been due in the absence of each provision.
Tax expenditure budgeting has three problems. First, computation is difficult to perform in
countries that lack computerized tax information systems. Second, some arbitrary judgments
are needed to determine which provisions are deemed tax expenditures. There is an inherent
fuzziness in defining the “normal” tax structure as a basis for identifying “deviations.” Deep
disputes have arisen over whether the normative system should use the traditional definition
of income based on accretions, or modern theories that suggest excluding capital income from
the tax base to establish neutrality between incentives for consumption and saving. 55 Using
the former approach, the elimination of tax on interest, dividends, and capital gains are
special tax breaks; using the latter approach, these are all normative principles, rather than tax
breaks. Other debates involve technicalities such as whether declining balance depreciation is
a tax break or a reflection of geometric obsolescence.
54 A good example is the definition used by the Canadian government: “Tax expenditures are foregone tax
revenues, due to special exemptions, deductions, rate reductions, rebates, credits and deferrals that reduce
the amount of tax that would otherwise be payable…to encourage certain kinds of activities or to serve other
objectives.” Source:
55 This is emphasized in Hall (1999).