Beyond the Budget: A Global Perspective on Social Spending through Tax Expenditures

This paper investigates the intricate interplay between tax expenditures (TEs) and social policy. Leveraging the Global Tax Expenditures Database (GTED), we carry out the first data-driven comparative assessment of direct spending and TEs for social welfare across countries to shed light on this often-overlooked aspect of fiscal policy. Our research reveals prevalent TE usage for social purposes and substantial costs in terms of revenue forgone worldwide, averaging over 1 per cent of Gross Domestic Product (GDP) and 6 per cent of tax revenue. Our analysis showcases varying strategies employed by countries, particularly emphasizing the reliance of high-income economies on TEs granted through personal income taxes, and low/middle-income countries predominantly using value-added tax-related TEs for social objectives. Our results also highlight the importance of functions such as housing in contributing significantly to social spending through TEs with the ratio tax expenditure/direct spending reaching roughly 365 per cent in the US and 203 per cent in France. Hence, our study underlines the necessity for meticulous evaluation and efficient design of TEs to better align TE regimes with governments social policy objectives as well as to minimise unintended social or economic consequences.