AN INTERNATIONAL COMPARISON OF TAX BASE EROSION DUE TO TAX EXPENDITURES

W.R. Singleton
Western Washington University
T. Nakamura
INGO International

ABSTRACT

The use of tax expenditures (tax incentives and tax subsidies) in different countries
provides a measure of tax base erosion due to governmental taxation choices. This study
compares a sample of selected countries’ use of tax expenditures to determine if countries differ
significantly in the extent of their use, the relative purposes for which they are used, and the
methods used for their implementation. Such a comparison is important for policy analysts in
different countries for tax base design, tax reform and assessment of tax incidence. In addition, tax
revenues (or lost revenues due to tax expenditures) affect government budget deficits, which in
turn influence monetary policy, hence the interest rates that face firms. At the firm level, taxes
have a direct impact on effective tax rates, and therefore on the cash flows that influence
investment decisions at the margin. Tax effects become even more complicated for firms operating
internationally, as different countries provide a different mix of direct expenditures and indirectly
with tax expenditures. Thus, a comparative analysis of tax expenditures in different countries
provides insights into a country’s tax and fiscal environment.
The results indicate that significant differences exist in the total use, purpose, and method
of implementation. In addition, the results of this study extend the work of the Organization for
Economic Cooperation and Development (OECD) conducted in 2010.

Keywords: Taxes, tax expenditures, tax subsidies, international tax policies