序 Legal Analysis of Tax Expenditure System, by Steven Xuhong Lee

Foreword　by

Jeffrey　Owens,　Director,　OECD　Centre　for　Tax　Policy　and　Administration

Tax　expenditures　may　be　defined　as　public　expenditures　delivered　through　the　tax　system,　using　special　tax　concessions　falling　outside　a　benchmark（norm）tax　system.　Special　tax　concessions　can　take　the　form　of　a　reduced　tax　rate,　a　tax　allowance　or　deduction　from　a　tax　base,　a　tax　credit　deducted　against　tax　payable,　tax　deferral　or　exemption,　or　other　form　of　offset　to　tax　liability.A　tax　incentive　to　stimulate　investment　is　a　classic　example.In　practice,　defining　a　benchmark‘norm'tax　system　is　controversial,　and　one　observes　considerable　differences　across　countries　in　chosen　benchmark　definitions　and　concepts.The　central　output　of　tax　expenditure　accounting　is　the　measurement　of　amounts　of　tax　revenue　foregone　by　tax　expenditures-that　is,　revenues　foregone　caused　by　deviations　of　the　actual　tax　system　from　the　norm　or　benchmark　tax　system.Various　estimation　methods　are　observed.

In　general,　the　motivation　for　regularly　measuring　and　reporting　tax　expenditures　in　budget　documents　is　to　strengthen　public　governance　through　increased　transparency　and　improved　management　of　public　funds.　Tax　expenditure　reporting　enables　measurement　of　total　public　expenditure　in　various　areas,　delivered　through　direct　cash　outlays　and　through　the　tax　system.It　curbs　scope　for　rent-seeking,　is　required　for　cost-benefit　assessments　of　tax　expenditure　programmes,　and　guides　policy　adjustment　and　fundamental　tax　reform.Six　areas　where　tax　expenditure　reporting　assists　policy-making　may　be　cited：

Management　of　overall　fiscal　position-by　estimating　revenue　foregone　due　to　tax　expenditures,　the　government　is　better　able　to　measure　its　fiscal　position（deficit/surplus）in　the　presence　and　absence　of　a　given　tax　expenditure,　thereby　contributing　to　fiscal　management.　Improved　fiscal　control　also　contributes　to　a　more　stable　and　certain　fiscal　framework,　encouraging　to　investment.

Management　of　budget　allocations-government　resources　are　allocated　in　part　to　various　policy　areas（e.　g.income　support,　industrial　support,　support　for　R＆D,　environmental　protection）through　both　direct　spending　and　tax　expenditures.Total　allocations（‘envelopes'）to　targeted　policy　areas　can　be　addressed　where　government　has　data　on　direct　spending　as　well　as　estimates　of　tax　expenditures.

Cost-benefit　assessment　of　incentives-assessment　of　the　net　social　benefit　of　taxrelief　targeted　at　a　given　activity　and/or　taxpayer　group　requires　an　assessment　of　tax　revenues　foregone　by　the　measure.　Tax　expenditure　measurement　addresses　the‘cost'element　of　such　assessments.An　assessment　of　the　amount　of　revenue　foregone　and　take-up　under　a　given　program　is　also　relevant　to　an　assessment　of　the　positive　impacts　or　benefits　of　the　expenditure.

Distributional　assessment　of　tax　relief-assessment　of　the　allocation　of　tax　relief　across　different　taxpayer　groups　enables　the　government　to　consider　the　income　distribution　impact　of　tax　expenditure　provisions（and　the　impact　of　adjusting　or　removing　them）.

Inform　policy-making-assessment　of　the　overall　budgetary　impact,　resource-allocation　and　distribution　effects,　as　well　as　revenue　costs　relative　to　benefits　of　tax　expenditures,　helps　inform　policy-making（e.　g.decisions　over　whether　to　continue,　abolish,　or　amend　a　tax　expenditure）.

Reduced　scope　for　corruption-transparent　assessment　of　tax　expenditures　reduces　scope　for　corruption　of　tax　administrators.　This　helps　encourage　taxpayer　compliance　and　provides　support　to　good　governance　throughout　the　operations　of　government.Indeed,　corruption　on　the　part　of　tax＆customs　officials　is　often　cited　as　a　main　contributing　factor　to　poor　public　governance.Reduced　corruption　and　administrative　discretion　in　deciding　tax　liabilities　is　also　encouraging　to　FDI,　for　a　number　of　reasons（e.g.by　providing　greater　certainty　over　tax　treatment），and　thus　reduced　investor　uncertainty　over　tax　liabilities　including　the　tax　treatment　of　other（rival）firms.

Looking　across　countries,　there　is　a　continuing　need　to　document　tax　expenditures　in　a　more　systematic　and　internationally　comparable　manner　to　facilitate　budget　discipline　and　to　foster　tax　reforms　that　seek　to　attain　the　advantages　of　broad　tax　bases　and　low　statutory　tax　rates.　Emphasis　on　tax　expenditure　reporting　in　the　near-to　medium-term　is　likely　to　entail　the　adoption　by　government　of　micro-simulation　models　needed　to　estimate　revenue　foregone　through　tax　concessions（with　reference　to　practices　pursued　for　example　by　certain　OECD　countries）.

Creating　tax　expenditure　models　and　datasets　to　enable　tax　expenditure　measurement　requires　a　significant　resource　commitment　on　the　part　of　government.　While　the　outlays　are　dwarfed　by　returns　on　investment,　the　costs　are　not　negligible,　and　many　countries　are　not　as　able　as　others　to　fund　such　work.Countries　with　tax　expenditure　measurement　frameworks　provide　a　great　benefit　to　others　where　they　assist,　by　sharing　expertise.For　over　15　years,　the　Centre　for　Tax　Policy　and　Administration　of　the　OECD　has　contributed　to　this　exchange　of　knowledge　and　experience　by　organizing　each　year　a‘micro-simulation　tax　analysis'workshop,　offering　quantitative　models　used　to　estimate　the　revenue　impact　of　corporate　income　tax,　personal　income　tax　and　value　added　tax　reforms,　including　adjustments　to　tax　expenditures.

Even　more　critical　to　the　exercise　is　the　adoption　by　countries　of　rules　and　procedures　to　ensure　that　tax　expenditure　reporting　is　embraced,　and　that　regular　reporting　is　undertaken　to　guide　tax　policy　development.　This　new　book　by　Dr.Steven　Xuhong　Lee　is　a　landmark　publication,　for　a　number　of　reasons.Firstly,　the　authoranalyzes　a　number　of　fundamental　legal　issues,　including　the　nature　of　tax　expenditure　reporting　and　issues　involved　in　incorporating　such　reporting　into　law.Secondly,　the　author　reports　detailed　empirical　and　cross-country　analyses　of　differences　in　the　legal　basis　of　tax　expenditure　reporting　in　western　OECD　countries.Thirdly,　groundbreaking　legal　research　is　presented　on　the　role　and　contribution　of　tax　expenditure　reporting,　and　inter-relationships　with　human　rights　and　freedoms,　efficiency,　justice　and　rule　of　law.Lastly,　the　author　proposes　to　construct　a　legal　system　to　support　tax　expenditure　reporting　in　China,　involving　the　modification　of　the　budget　law　of　China,　and　the　formulation　of　regulations　on　tax　expenditure　reporting.Detailed　suggestions　for　practical　implementation　are　also　provided.There　is　no　doubt　that　this　analysis　will　be　invaluable　as　China　pursues　reform　of　its　tax　system.

At　present,　there　are　very　few　research　publications　addressing　these　important　issues　required　to　advance　tax　expenditure　measurement　and　reporting.　Dr.Lee's　research　proposes　a　model　of　tax　expenditure　legislation　on　the　basis　of　a　careful　analysis　of　legal　practices　observed　in　tax　expenditure　reporting　in　other　countries.His　model　provides　a　useful　reference　for　improving　tax　expenditure　systems　in　other　countries,　and　in　particular,　for　developing　countries　working　towards　establishing　a　tax　expenditure　system　to　support　tax　policy　assessment　and　reform.

Dr.　Steven　Xuhong　LEE　has　held　a　number　of　positions　in　the　Tax　Policy　Department　of　the　Ministry　of　Finance　of　China.Since　2005，as　a　representative　of　Ministry　of　Finance　of　China,　he　has　participated　as　an　observer　in　meetings　of　Working　Party　1　of　the　OECD　Committee　on　Fiscal　Affairs,　and　the　related　Global　Forum.In　2009，the　Tax　Policy　Department　of　the　Ministry　of　Finance　of　China　hosted　in　Beijing　the　Third　International　Tax　Dialogue　Global　Conference,　led　by　the　OECD　together　with　other　international　organizations.Dr.Lee　was　the　Executive　Secretary　of　China's　planning　committee,　and　helped　ensure　a　successful　outcome　of　the　meeting.

Feb.，2012