The decision by the Abbott government not to provide $25m assistance to SPC Ardmona once again brought to the fore the issue of government assistance. Largely ignored was that on the same day of the SPC Ardmona decision, the Treasury released its annual tax expenditures statement. It documented the billions of dollars in revenue which is forgone each year due to exemptions within the taxation system.



The tax expenditure statement details every exemption and favourable treatment given within the tax system.



Rather coincidentally the IMF has recently been looking at tax expenditures in certain countries. In mid-January an IMF-produced working paper on tax expenditure in Italy (thanks to Matt Cowgill for the tip) designed to investigate ways to fix the budget mess Italy has found itself in.



In doing so it pointed to three main aspects of tax expenditures.



1. Tax expenditures can compromise fairness.

The paper noted that: "Tax expenditures can be a poor way of pursuing equity objectives: in a progressive

tax system... any policy that reduces taxable income will benefit most those in the highest marginal tax bracket and convey no benefit to those out of the tax system."



Thus if you are providing an exemption or a concession on a tax, it will inherently favour more those whose incomes mean they would normally pay higher tax rates. Similarly, the exemption on capital gains tax on the family home, requires you first to own a home to be able to benefit from such an exemption. In such a case not only does the tax exemption favour the wealthier, it also favours those who were fortunate enough to buy a home when they were significantly more affordable than now.



2. Tax expenditures can be inefficient and poorly targeted.

The paper noted that tax expenditures can create unintended or unwelcome distortions. When you provide exemptions within the tax system, people will seek to take advantage of those exemptions. In Australia one of the biggest behaviour changers is the concessional treatment of superannuation - leading people to contribute more to their super than they otherwise would purely because of the tax break they receive. And once again those who receive the biggest tax break are those on higher incomes.



3. Tax expenditures are vulnerable to lobbying.

The paper noted that "special interest groups may find it easier to argue for tax breaks than for explicit spending support". This is a big one. Arguing for government funding is hard - it is visible. It evokes visions

of money going to big multi-nationals. It is much easier to argue for concessions which don't get specifically quantified per company. The concessions on superannuation benefit all superannuation companies, but none is seen to get an individual grant as is the case with Holden or SPC Ardmona.

But if any government tries to get rid of the concessions, just listen to the lobby groups, and parts of the media squeal.

Interestingly, the IMF working paper displayed that Australia actually has a greater amount of tax expenditures per GDP than Italy or many other advanced economies.

How Australia's tax expenditure compares.

This is not necessarily a bad thing. Not all tax expenditures are "bad" – and also comparing them across nations is rather tricky. But it does highlight just how big are the concessions and exemptions in our tax system.



The Treasury each year lists the major revenue foregone from tax expenditures, but for the first time, this year it also included an account of the "revenue gain" which would occur were

the concession or exemption removed.



Click here to see on mobile.

The differences between the two measures occur because of the aforementioned behaviour changes. For example, currently superannuation contributions for those earning between $37,000 and $300,000 are taxed at a flat 15% rather than the marginal rate of income tax.





Click here to see on mobile.

This and other superannuation concessions – for example that investment earnings (including capital gains) can be tax exempt if they are from assets supporting superannuation pensions – means $32.1bn in revenue foregone. But Treasury estimates that were such concessions removed, people would change how they contribute to their superannuation. As such the revenue to be gained is "only" $27.65bn.



The government is actually seeking to remove part of this concession. It intends to remove the low income super contribution scheme so the contributions of those earning under $37,000 will again be taxed at 15%.



This rather oddly will be a case of removing a tax expenditure which actually favours the least wealthy. Quite an achievement, really.



In some instances - such as removing the capital gains tax on the family home - Treasury is unable to calculate the tax gained, because the uncertainty around the behaviour changes of home owners is too great.



But clearly there are significant improvements to the budget to be made, should Joe Hockey deem the "budget emergency" great enough.



But while focusing on the superannuation concessions does highlight the great inequity of tax expenditures, the IMF working paper also notes Italy's concessions on its version of the GST - the value added tax (VAT). The paper notes that the concessions in Italy's VAT do not best achieve the aims of reducing inequalities.



Our GST has numerous exemptions – food, education, health, financial supplies – which if removed would improve government revenue by around $15bn a year.



As I noted last August, removing those exemptions would make the tax system more regressive, but not so much that it could not be overcome through either direct payments or changes to income tax rates.



But the Abbott Government has already ruled out any changes to the GST, and the negativity attached to any proposal to change the GST highlights the other factor of tax expenditures – the longer they remain in place, the more people view them as permanent parts of the system.