Bribing the taxpayer
Wasteful tax perks are sadly common

Jan 25th 2014 | From the print edition

ANY talk of tax reform in America quickly turns to “tax expenditures”, meaning the code’s myriad exemptions, deductions and credits. These now cost 7% of GDP. Economists deride many of them as handouts for influential firms and middle-class voters. But for just that reason, politicians are reluctant to curb them. A new paper from the IMF suggests other countries have much the same problem.

America, it turns out, is not the most profligate provider of tax breaks. Australia and Italy spend more on them, as a proportion of their GDP. Britain and Spain are not far behind. The bulk of the spending goes on individual income-tax relief for things like saving for pensions and interest payments on mortgages.

That Europe still spends lavishly on tax discounts in spite of its fiscal problems is especially striking. Italy gives away €1.8 billion ($2.4 billion) each year on tax breaks for farmers alone. Germany spends over €2 billion a year subsidizing bonus payments for working evenings and weekends—an incentive first introduced by the Nazis to boost munitions production during the second world war.

The financial crisis has been a missed opportunity to cut this sort of outdated largesse, says Pierre Leblanc of the OECD. While some countries have trimmed them to help cut their deficits, others, like Britain and France, have introduced new ones to encourage investment. Overall, they remain at a similar level to before the crisis.

The IMF argues that now is the time to roll back tax breaks to help cut budget deficits. Regular review would increase scrutiny of outdated perks. Many could be replaced with more targeted measures: most of the benefit is currently enjoyed by the rich rather than those needing help. For instance, over half of income-tax breaks in America go to the richest 20% of households, according to the Congressional Budget Office. The poorest 20% are left with just 8% of the pie.

Spain is reviewing its tax expenditures as part of its austerity drive. But Italy is a more typical case. The IMF sees scope for making savings of up to €61 billion. Yet the latest budget law, passed last month, requires tax breaks to be pruned by just €10 billion by 2017. Even that proved politically unpalatable: on January 21st the government was reported to be rescinding the planned cuts. Higher taxes, it seems, are unpopular everywhere.

From the print edition: Finance and economics