IMF How To Notes

How to Evaluate Tax Expenditures

Author/Editor:

Sebastian Beer ; Dora Benedek ; Brian Erard ; Jan Loeprick

Publication Date:

November 30, 2022

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

Governments use tax expenditures (TEs) to provide financial support or benefits to taxpayers. The budgetary impact of TEs can be similar to that of direct outlays: after the support is provided, less money is available to fund other government priorities. Systematic evaluations are needed to guide informed decision-making and to avoid a situation where the narrative on the benefits of TEs is primarily driven by profiting stakeholders. By TE “evaluation,” this note refers to a process that seeks to systematically inform policymakers on the desirability of introducing or maintaining specific tax benefits by gathering and analyzing available quantitative and qualitative information on their effects. Evaluation processes can be tailored to different levels of data availability and analytical capacity. An evaluation should focus on the policy objective of a TE and whether it effectively and efficiently contributes to that policy objective. Although important lessons can be learned from country practices in implementing increasingly ambitious evaluation processes, there is no single best-practice approach to replicate.

Series:

How-To Note No 2022/005

Subject:

Expenditure Public financial management (PFM) Revenue administration Tax policy Taxes

Frequency:

occasional