Tax Expenditures and the Fiscal Contract

• Applicant: Dr. Christian von Haldenwang
• Subject Area: Political Science ; Economic Policy, Applied Economics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 510196533

The project aims at shedding light on a topic that has not been widely researched so far: How does the use of tax expenditures in low- and middle-income countries impact on the fiscal contract? The notion of a “fiscal contract” between the state and the taxpayers (both citizens and businesses) refers to an implicit agreement that links individual tax compliance and the distribution of the tax burden within a society to public service delivery and access to political decision-making. The concept has proven to be highly relevant to understand patterns and dynamics of taxation in countries worldwide, including low- and middle-income countries. Tax expenditures are preferential tax treatments (such as reduced rates, exemptions, etc.) for specific taxable activities or groups of taxpayers. They often have a strong impact on the distribution of the tax burden within a given society, both in terms of horizontal equity (unequal taxation of similar activities or assets) and vertical equity (a shift of the tax burden in favour of the wealthier segments of society), and also a sizeable impact on the fiscal space of governments. At the same time, tax expenditures tend to make the tax system more complex, and they are set up or maintained by means of decision-making processes that are often less transparent than ordinary budget decisions or tax reforms. The project will generate new evidence on the specific role tax expenditures play for fiscal contracts by looking at three basic mechanisms that drive this relationship: distribution, accountability and perceptions. Further, it will broaden the fiscal contract debate, which has focused mainly on individual taxpayers, by incorporating an additional focus on government-business relationships. The project will be structured in five work packages (WPs). WP 1 provides evidence on tax expenditure use across the world and how it relates to patterns of distribution, political rule and institutional capacity. WP 2 explores how the use of tax expenditures affects fiscal bargaining and accountability by zooming in on a specific country, Zimbabwe. WP 3 studies how the use of tax expenditures affects perceptions of tax fairness and tax compliance, combining macro-level research with in-depth case studies in Colombia, Morocco and Uganda. WP 4 analyses how information on the real distributional effects of tax expenditures leads to shifting attitudes, based on randomised information treatment testing in a specific case, Morocco. Finally, WP 5 will bind the above-mentioned work streams together in order to address the overarching research question, produce synthesising papers and engage with a wider public on the key messages derived from the project.

• DFG Programme: Research Grants
• International Connection: France
• Co-Investigator: Dr. Armin von Schiller
• Cooperation Partner: Professor Dr. Jean-Francois Brun