The Political Economy of Tax Expenditures: Fragmentation versus Volume

Mauro Marè (), Francesco Porcelli () and Francesco Vidoli ()
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Mauro Marè: Luiss University
Francesco Porcelli: Sapienza University of Rome
Francesco Vidoli: Department of Economics, Society & Politics, Università di Urbino Carlo Bo

No 2602, Working Papers from University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini

Abstract: Tax expenditures are delivered through many legally distinct provisions rather than through a few salient programs. We argue that the number of provisions, not the aggregate revenue foregone, is the margin on which their political economy operates. We develop a three-agent model in which a rent-seeking firm lobbies for tax expenditures, a vote-maximizing politician chooses visible public goods, the volume of tax expenditures and the number of provisions through which they are delivered, and a Treasury official with an institutional preference for budget transparency can expose their hidden cost at the risk of political retaliation. Fiscal illusion is micro-founded as an increasing, concave function of the number of provisions, so that fragmentation is the channel through which opacity is produced. In the subgameperfect equilibrium, a stronger Treasury enforces more, and stronger enforcement reduces both the volume and the fragmentation of tax expenditures while leaving visible public goods essentially unchanged. The number of provisions has no source of variation independent of the opacity mechanism, whereas revenue foregone also reflects legitimate redistributive demand: the count of provisions is therefore a structurally cleaner signal of political capture than the aggregate fiscal magnitude, and institutional quality should discipline fragmentation more robustly than volume. The model yields three testable hypotheses for cross-country data in which provisions are counted separately from revenue foregone.

Keywords: Tax Expenditures; Fragmentation; Fiscal Illusion; Lobbying; Budget Institutions (search for similar items in EconPapers)
JEL-codes: D72 D78 H20 H30 H61 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2026, Revised 2026
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