Tax Expenditures

Abstract

We explain the issues that arise with tax expenditures and we consider how international cooperation can contribute. We present three concrete policy proposals. The first concerns the benefits from more technical cooperation on the estimation of the magnitude of tax expenditures, their economic effects, and on best practices. The second is that development aid no longer be exempted from tax in recipient countries. By paying their taxes, donors would gain credibility as partners in efforts to rationalise tax systems and improve domestic resource mobilization. The move would also undoubtedly be warmly received by aid recipients. The third calls for reinforced efforts to phase out fossil fuel subsidies, including tax exemptions. Such a move not only provides incentives for shifting to a low-carbon economy. It could also provide financial leeway for climate adaptation and mitigation as well as protection measures to mitigate the social costs of adaption.