Taxes, transfers and tax expenditures

Government revenue and expenditure are closely linked, and in some cases are effectively interchangeable. In many instances, both revenue and expenditure policies can be used to achieve the same aims. This Chapter explores the interrelation between taxes and transfer payments, ‘tax expenditures’, and how focusing on the government’s tax take alone can be misleading.

Tax expenditures are a prime example of this interchangeability, whereby the government consciously chooses to reduce taxes in selected areas and foregoes revenue to achieve a policy objective that is analogous to spending.

This chapter takes a very broad perspective of taxes, transfers and ‘welfare’ which goes beyond how these terms are often used. In doing so, we aim to expand your thinking about how transfers and tax expenditures can play equivalent roles in achieving policy outcomes.