Currently, there is no single, universally accepted definition of a tax expenditure. The terms tax benefit, tax incentive, tax concession, fiscal stimulus, and tax break are more commonly used. Although each government defines the technical term tax expenditure according to the particularities of its tax scheme, it is possible to identify some common characteristics. In general, tax expenditures are preferential treatments granted to individuals and businesses in order to reach specific aims, such as promoting investment, generating employment, improving income distribution, and boosting the competitiveness and productivity of certain sectors of the economy. But what are the implications of making use of tax expenditures? For governments, tax expenditures represent a revenue loss. For taxpayers, they signify a reduction, exemption, or deferral of tax payments. Tax expenditures often take the form of differentiated rates, exemptions, subsidies, tax deductions and credits, among others.
Although the main advances in terms of public finance transparency and accountability have been indirect spending programs, there is a growing recognition of the importance of increasing the scrutiny of tax expenditures as well. In Mexico, tax expenditures amounted to 5.15 percent of gross domestic product (GDP) in 2011, while tax revenue represented 10 percent of GDP. Such a significant amount of resources shows why budget transparency cannot be limited to direct spending programs, as tax expenditures form a considerable part of public spending. Because of this, the management of tax expenditures should be more transparent in order to shed more light on how they work, who authorizes them, who benefits from them, how they are estimated, and what benefits they generate. This information is essential to fostering more informed government decision making. Also, transparency and accountability stimulate citizen interest in public affairs and boost monitoring by nongovernmental organizations and other stakeholders, which in turn can lead to improved public policy performance.
This paper is divided into six sections that aim to examine the state of tax expenditures in Mexico in order to identify areas of opportunity to improve their transparency and effectiveness. For this purpose, the paper incorporates points of view from different actors involved in the subject matter. Perhaps the lessons learned from Mexico will serve as a reference for other countries.
Author: Liliana Alvarado
Orginal publication date: May 2014
Publisher: International Budget Partnership
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