This blog was first published by the Social Policy Association (SPA)
When we think of government spending on social programmes, we generally picture direct cash transfers, public healthcare, education and subsidized housing. Yet a significant portion of social spending happens outside the traditional budget. Tax expenditures (TEs) are those tax reliefs classified by governments as designed to pursue social or economic objectives by not collecting tax. They can include exemptions, deductions, and credits that reduce tax liabilities of beneficiary taxpayers. How many tax reliefs are so classified varies considerably. In the UK for example only a third of all tax reliefs are classified as tax expenditures: in some countries most are so recognised. They constitute a hidden welfare state that is often overlooked in policy debates.
In a recent paper, leveraging the Global Tax Expenditures Database (GTED), we show that TEs created/designed for social purposes are substantial, averaging over 1% of Gross Domestic Product (GDP) and 6% of total tax revenue worldwide (Figure 1). Indeed, in some cases, governments support certain social policy goals more through tax benefits than direct public spending.
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