Sixty years after Stanley Surrey coined the term ‘tax expenditures’, an increasing number of countries worldwide report on tax expenditures but still lack effective management systems. Australia’s 1975 Asprey Review represents a critical missed opportunity to embrace fiscal management principles for these hidden subsidies. In this blog, we reflect on that missed opportunity.
Stanley Surrey, who served as Assistant Secretary for Tax Policy in the United States, first coined the term tax expenditures in 1967, referring to tax concessions offered by the government, such as tax credits, deductions, exemptions, and exclusions. Surrey’s philosophy was grounded in the notion that governments provide these expenditures, which are equivalent to direct spending, through the tax system. Thus, the same governance and evaluation systems should be applied to tax expenditures as direct expenditures, requiring fiscal management frameworks. Yet today, countries worldwide, including Australia, lack effective systems for managing tax expenditures. Contemporary tax expenditure management is stalled at the reporting stage, while the governance and evaluation of these expenditure items, as Surrey envisioned, are almost absent.
Our article in the Journal of Australian Taxation critiques one of Australia’s most important reviews of its tax system, the 1975 Asprey Review, in which the tax expenditure concept could have been embraced from a fiscal management perspective. Although the review was conducted a few years after the concept of tax expenditures was articulated, it represents a missed opportunity to develop genuine expenditure management proposals. This potentially created a trajectory in which Australia’s tax expenditure recognition is contained within a regime that relies heavily on expenditure item reporting rather than a fiscal management framework with rigorous governance and evaluation mechanisms.
The Origin of the Concept: Tax Expenditures (Management)
Sometimes overlooked is Surrey’s advocacy not only for the reporting of tax expenditures but also for their management. He once wrote that the concept of tax expenditures should guide the principles of tax reform and improvements to the federal tax system. He emphasised that these expenditures constitute government financial assistance (i.e., subsidies) and do not form part of the structure required for an effective income tax system.
In Surrey’s 1973 book Pathways to Tax Reform: The Concept of Tax Expenditures, published by Harvard University Press, he theorised a tax expenditure framework, outlining the need to identify, measure, budget for, and evaluate these expenditures in the same manner as direct spending programs. The philosophy behind the introduction of the tax expenditure concept was to subject these hidden government expenditures to the same scrutiny as direct spending. In simple terms, the underlying rationale for the tax expenditure concept is the application of fiscal management principles, notably transparency, budgetary discipline, and systematic evaluation, to tax-based subsidies, treating them as explicit policy instruments rather than as part of the normal tax structure.
Parallels in Australia: The Asprey Review
At the same time as the tax expenditure concept gained momentum in the US and globally, Australia was undergoing one of its most significant tax reviews, the 1975 Asprey Review, shaping tax reforms for decades to come. The Asprey Review was built on three enduring principles that underpin the Australian tax system: efficiency, equity, and simplicity.
The Review’s scope was regarded as comprehensive. It paved the way for multiple significant reforms in the federal tax system, including the introduction of the capital gains regime, employee fringe benefits scheme, and the broad-based consumption tax. While the Review undoubtedly represents a key milestone in shaping Australia’s tax regime, the tax expenditures framework, particularly from the perspective of being assessed as the equivalent of direct spending programs, was overlooked. The Asprey Review Committee recognised tax concessions as an integral part of the system but continued to view these expenditures through the three traditional principles of efficiency, equity, and simplicity. The term tax expenditures was not used, and the perspective it captures regarding the equivalence to direct spending was missed.
A systematic content analysis of the Asprey Review report to empirically identify the extent to which the tax expenditure concept (though the term was not used) was considered is revealing. The analysis indicates that the committee referred to the concept of tax expenditures 38 times in the report, with most citations focusing on the administrative challenges of these concessions and equity concerns. While the committee demonstrated a sophisticated understanding of the issues identified in Surrey’s tax expenditure framework, its analysis and articulation of those issues were oriented toward the three traditional principles. The consequence of framing tax concessions through the three traditional principles rather than as the equivalent of direct spending was the entrenchment of an institutional trajectory focused on reporting rather than genuine management.
An Opportunity Missed?
Australia’s use of tax expenditures as indirect subsidies dates back to the early 1900s, when concessions were offered for invalid and old-age pensions. Although the term tax expenditure was not used, the equivalence between direct spending and tax concessions was noted in budget papers and tax reviews in the early 1970s. In 1973, the Coombs Review (the Review of the Continuing Expenditure Policies of the Previous Government), undertaken by the federal government at the time, analysed 48 tax expenditure schemes, referring to them as disguised expenditures and highlighting the need for enhanced scrutiny of these expenditures. This was followed by the Fitzgerald Report to the Minerals and Energy Minister in 1974, which quantified the contribution of tax concessions to the mineral industry.
In hindsight, the conceptualisation of tax concessions in both reviews was in line with Surrey’s approach to tax expenditure, which placed scrutiny and evaluation at the centre. In contrast, the Asprey Review in 1975 used the term ‘tax concessions’ throughout the report, viewing them solely through the lenses of equity, simplicity, and efficiency, overlooking the fact that they are the equivalent of direct spending. This represents a significant missed opportunity in tax reform and the genuine management of tax expenditures.
Lessons from Australia
The result is that Australia has a large number of tax expenditures, with growth to date, yet without rigorous evaluation or governance to determine whether they achieve the intended policy objectives. The practice has largely remained focused on identification and reporting through an annual Tax Expenditures and Insights Statement, rather than applying management principles to these fiscal expenditures, treating them as direct outlays. The latest Statement indicates that there are over AUD 200 billion in annual concessions. This is a figure that, if administered as direct spending, would expand the federal Budget by more than one-third. Yet unlike direct spending programs, these concessions require no annual parliamentary appropriation, no systematic evaluation of whether they achieve their intended objectives, and no regular comparison against whether direct spending might deliver the same policy goal more effectively or equitably.
Ultimately, through the review of Australia’s tax expenditure trajectory, we identified a potentially missed opportunity to advocate for more substantial reforms, highlighting the need for the continuous conceptualisation of tax expenditures as revenue foregone and as equivalent to direct spending, the development of comprehensive tax expenditure management frameworks and the application of the same level of scrutiny and evaluation as for direct spending. We continue to advocate for tax expenditure management rather than mere reporting (see our recent submission) and hope that the current Australian Board of Taxation’s Red Tape Reduction Review will take note. Our recommendations in that submission suggest that mandatory sunset clauses requiring evidence-based renewal, a Tax Expenditure Performance Dashboard that publishes compliance costs and distributional data for all major concessions, and a legacy provision cleanup to consolidate or repeal outdated measures are needed.