Bernard Keane Wrong on Tax Expenditures

Writing in Crikey, Bernard Keane says:

Every year the government forgoes more than $100 billion in tax revenue courtesy of exemptions and concessions in the tax system.

This is an all-too-common journalistic error that stems from a misreading (or failure to read) the Treasury’s Tax Expenditures Statement.  Here is how Treasury describes its methodology:

The estimates of tax expenditures in this statement are prepared under the ‘revenue forgone’ approach which calculates the value of tax expenditures in terms of the benefit to the taxpayer of the tax provisions concerned…

Revenue forgone estimates differ from budget revenue estimates because they are estimated relative to different benchmarks…It does not necessarily follow that there would be an equivalent increase to government revenue from the abolition of the tax expenditure.

the revenue forgone approach requires only a single consistent assumption regarding behavioural responses to removing a concession (no behavioural change) which allows the value of a tax concession to be based on the actual (or projected) level of transactions.

The critical assumption of no behavioural change invalidates Keane’s inferences about the implications of various tax expenditures for budget revenue.

posted on 14 May 2010 by skirchner in Economics, Fiscal Policy

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