Tax Expenditures in the EU: Recent Trends and New Policy Challenges

Tax expenditures are tax relief measures targeted at some socially desirable activities or specific groups of taxpayers. This paper reviews issues related to tax expenditures in the EU and presents some stylised facts related to tax expenditures in personal income taxation (PIT), value-added taxation (VAT), and corporate taxation. Like spending programmes, tax expenditures can be used for allocative or redistributive purposes. At the same time, tax expenditures can make the tax system more complex, less transparent, may have adverse distributional impacts, and they can result in substantial revenue loss. They may also, in some cases, result in harmful tax competition among Member States. The tax-benefit microsimulation model EUROMOD is employed to simulate the fiscal and distributional impacts of two specific sets of tax expenditures. Tax expenditures in PIT that are covered by this study are estimated to represent about 16% of tax revenues from PIT in the EU27 (corresponding to about 1.2% of GDP on average). Reduced VAT rates represent a similar magnitude at about 16% of VAT paid by households in the EU27 (corresponding to about 1.1% of GDP on average). Regular reporting, monitoring and assessment of tax expenditures is crucial as it allows Member States to review and revise their tax policies. Eliminating or reducing (ineffective or cost-ineffective) tax expenditures can, in some cases, create crucial fiscal space that allows for stronger fiscal consolidation, a revenue-neutral reduction in statutory tax rates, or growth-friendly tax shifts.