TAX EXPENDITURES IN THE EU: RECENT TRENDS AND NEW POLICY CHALLENGES

A. Turrini, J. Guigue, A. Kiss, F. Lanterna, A. Leodolte, C. Leventi, F. Neher, A. Papini, F. Picos, M. Ricci and K. Van Herck

Quarterly Report on the Euro Area (QREA), 2025, vol. 24, issue 3, 7-17

Abstract: Tax expenditures are tax relief measures targeted at socially desirable activities or specific groups of taxpayers. Like spending programmes, tax expenditures can be used for allocative or redistributive purposes. At the same time, tax expenditures can make the tax system more complex, less transparent, may have adverse distributional impacts, and they can result in substantial revenue loss. Using the tax-benefit microsimulation model Euromod this chapter simulates the fiscal and distributional impacts of two specific sets of tax expenditures: those in personal income taxation (PIT) and reduced value-added tax (VAT) rates. The tax expenditures in PIT that are covered by this chapter are estimated to represent about 17% of tax revenues from PIT in the euro area (corresponding to about 1.4% of GDP on average). Reduced VAT rates represent about 16% of VAT paid by households in the euro area (corresponding to about 1.1% of GDP on average). Eliminating or reducing ineffective (or cost-ineffective) tax expenditures can create crucial fiscal space that allows for stronger fiscal consolidation, a revenue-neutral reduction in statutory tax rates, or growth-friendly tax shifts.

Keywords: taxation; tax expenditure; inequality (search for similar items in EconPapers)
Date: 2025
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