The Commonwealth Treasury


Tax Expenditures Statement

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2

Overview of tax expenditure aggregates

2.1 Introduction

Tax expenditure aggregates are reported and analysed in this chapter, with a breakdown of tax expenditures by both function and taxpayer affected. Care must be taken when interpreting these aggregates, particularly when making comparisons across time. There are several major considerations that need to be taken into account when analysing tax expenditure aggregates.

2.2 Trends in tax expenditures

Total measured tax expenditures as a share of GDP are reported in Table 2.1.

Table 2.1: Total measured tax expenditures(a)

Table: Total measured tax expenditures(a)

(a) Total measured tax expenditures are derived by summing the individual tax expenditure estimates in Table 5.1, and excluding items with estimates listed as being 'less than' (eg. <1, <5), rounded to zero (..) or na.

Tax expenditures as a proportion of GDP are estimated to have increased from 4.4 per cent in 1998-99 to 4.5 per cent in 2000-01 and are projected to fall to 3.7 per cent in 2005-06.

The increase in total measured tax expenditures, as a share of GDP in 2000-01, largely reflects the first full year operation of the Family Tax Benefit (a tax-exempt payment) (A45) and the introduction of the capital gains tax (CGT) discount for individuals (D41). The subsequent projected decline reflects the impact of the policy decision to remove accelerated depreciation for plant and equipment (D69).

2.3 Tax expenditures by function

Total measured tax expenditures by functional category are reported in Table 2.2 for the period 1999-00 to 2005-06. The year-to-year variations in functional aggregates are explained largely by policy decisions, particularly those related to The New Tax System. Significant movements in functional categories are listed below. (Tax expenditure reference codes used in chapter 5 and Appendix A are reported in parentheses.)

Table 2.2: Aggregate tax expenditures by function(a)

Table 2.2: Aggregates tax expenditures by function(a)

(a) Total tax expenditures by functional category are derived by summing the individual tax expenditure estimates in Table 5.1, and excluding items with estimates listed as being 'less than' (eg. <1, <5), rounded to zero (..) or na.
(b) Items may not sum due to rounding.

Changes in functional aggregates relative to the 2001 Tax Expenditures Statement largely reflect the availability of estimates for items that were previously unquantifiable, the availability of new data that causes existing estimates to be significantly revised and the introduction of new tax expenditures.

2.4 Comparison with direct expenditure

The tax expenditure estimates for 2001-02 by functional category are presented alongside direct government expenditure in Table 2.3. The list of direct expenditures by function is reproduced from Table 3 of the 2001-02 Final Budget Outcome.

Comparisons between tax expenditures and direct expenditures are informative in broad terms, although the costings are not strictly comparable for the following reasons:

For tax exempt and tax offset personal cash transfers, the addition of tax expenditures and direct expenditures will tend to overstate the impact on the fiscal balance. For example, in the case of A40 (exemption of certain social security and repatriation payments), the direct expenditure column includes the full cost to government of the programme; however there is also an associated tax expenditure for the value of the income tax exemption to the recipient. Other examples include A31 and A41 to A48. (An equivalent point applies to the addition of refundable tax offsets and the value of the tax exemption in Table 2.2 for tax expenditures A31 and A451.)

Table 2.3: Aggregate tax expenditures and direct expenditures by function in 2001-02

Table 2.3: Aggregate tax expenditures and direct expenditures by function in 2001-02

(a) Total tax expenditures by functional category are derived by summing the individual tax expenditure estimates in Table 5.1, and excluding items with estimates listed as being 'less than' (eg. <1, <5), rounded to zero (..) or na.
(b) Items may not sum due to rounding.

As reported in Table 2.3, total measured tax expenditures in 2001-02 are valued at $29.9 billion. Social security and welfare tax expenditures comprise 60 per cent of total measured tax expenditures.

When compared to the sum of both total measured tax expenditures and total direct expenditure, 15 per cent of total government assistance is provided through tax expenditures.

The proportion of government assistance delivered through tax expenditures, however, varies greatly by functional category. In most cases, the assistance provided by direct expenditure significantly exceeds the benefit provided by tax expenditures. The exceptions are:

2.5 Tax expenditures by taxpayer affected

While many tax expenditures may be accessed by more than one group of taxpayers, they are often targeted to particular taxpayer groups. This section provides a broad indication of how the main taxpayer groups benefit from tax expenditures. The purpose of this analysis is to provide an overall picture of the direction of tax expenditures despite the difficulties in determining the final beneficiary of the assistance.

For the purpose of this analysis, the classification of 'taxpayer affected' is by the legal incidence of the tax. Legal incidence should not be confused with the economic incidence of a tax measure. Legal incidence refers to the taxpayer upon which the tax is levied. In contrast, the economic incidence of a tax relates to the taxpayer (or taxpayers) that bear the cost of a tax, or benefit from a tax expenditure. Economic incidence will differ from legal incidence if the group bearing the legal incidence is able to pass on some or all of the cost or benefit of the tax, and thus have it feed through into prices (including factor prices, such as wages and the return on capital).

Total measured tax expenditures by taxpayer affected are reported in Table 2.4. The major influences behind changes in taxpayer-affected aggregates are generally the same as those listed in chapter 2.3. For example, the increase in personal income tax expenditures in 2000-01 reflects the introduction of both the CGT discount for individuals (D41) and Family Tax Benefit (A45) (a tax-exempt payment). The increase in the tax expenditures for primary producers from 1999-00 to 2002-03 mainly reflects increased use of Farm Management Deposits (FMDs) (D92). The subsequent decline for primary producers reflects the change in projected tax expenditures for averaging of primary producer incomes (D9) and FMDs, which, due to the volatility in the estimates, are not reported beyond 2002-03.

Table 2.4: Aggregate tax expenditures by taxpayer affected(a)

Table 2.4: Aggregate tax expenditures by taxpayer affected (a)

(a) Total tax expenditures by taxpayer affected are derived by summing the individual tax expenditure estimates in Table 5.1, and excluding items with estimates listed as being 'less than' (eg. <1, <5), rounded to zero (..) or na.
(b) Expenditures included in the 'Miscellaneous' category are those for which the 'taxpayer affected' does not belong to any of the other identified categories.
(c) Items may not sum due to rounding.

The following provides, for measured tax expenditures, a list of tax expenditure reference codes that correspond to each category of taxpayer affected.

Businesses

B5, D18, D25, D36-D38, D59-D61, D63, D64, D69-D73, D75-D82, D84, D98, D102, E1, E2, E4-E6, E8-E10

Defence force personnel, including veterans and their families

A10, A11, A16, A19, A21, A48, C3, C4

Donors to approved organisations

A65

Employees

B2-B4

Employers

C16, C20, C23, C32, C33, C42, C57, D21

Financial institutions

D22, D29, D103

Government

D31

Hospitals and State and Territory authorities

C8

Superannuation funds and beneficiaries, termination payment recipients

B1, B6

Non-profit organisations

C13, C35, C37, D1, D6, D8, D20

Personal income taxpayers

A9, A18, A27-A34, A36-A39, A41, A43-A46, A53, A54, A59, A69, A70, A72, B9, D16, D41, D42, D44, D48, D87, D89

Retirees and allowees

A35, A40, A42, A47, A52

Primary producers

D9, D12, D14, D51-D53, D55-D58, D91, D92, E7

Students

A23

Non-residents

A6, D50, D95, D101, D110

Miscellaneous

A2, A3, A55, A67, C22, D27, D28

 


1 From 2001-02, refundable tax offsets are identified as an expense and are therefore no longer treated as tax expenditures. Prior to that time they were treated as either expenses or tax expenditures. The value of the income tax exemption to the recipient is still treated as a tax expenditure.