Allowances and credits in the tax system
An overview of tax allowances and tax credits and their contribution to the operation of the tax system
The 48 tax allowances and credits provided for in 17 laws intended to simplify the tax system are not periodically evaluated and, if necessary, revised by the State Secretary for Finance as agreed. The government is failing in its duty of evaluation. Neither the government nor parliament knows whether the tax instrument is a true reflection of reality, one of the aims of allowances and credits.
Allowances and credits not periodically evaluated as agreed
The Court of Audit provides an insight and an overview of tax allowances and credits in its report, Allowances and Credits in the Tax System. The report fulfils part of the Court’s strategy for 2016-2020 of auditing the revenue side of the central government budget. Allowances and credits are fixed sums added to or deducted from certain groups of taxpayers’ income if they enjoy an advantage or suffer a disadvantage, such as unearned income (box 3), home ownership, public transport credit or the benefit in kind of a company car.
Half of the 48 allowances and credits have not been revised since 2010, whereas the regulations require them to be evaluated at least once every seven years. But circumstances have certainly changed since then; interest rates have been falling for many years and life expectancies have been gradually increasing, at different rates, for men and women. Allowances and credits are not systematically (periodically) evaluated and parliament is therefore not systematically informed of their development and whether or not they are still appropriate.
Allowances as an efficient instrument to collect taxes?
Our audit found that the State Secretary for Finance did not monitor whether tax allowances and credits contributed to the efficiency of tax collection by the Tax and Customs Administration. The Administration’s efficiency is one of the main reasons to use this tax instrument. The alternative is to take individual measures for each taxpayer.
No visible evaluations had been made of the efficiency gains (and other benefits) and the costs of any of the allowances and credits we audited.
What are our recommendations?
The Court of Audit recommends that the allowances and credits be periodically assessed, separately from the duty of evaluation. An evaluation can look at the current (economic) reality and the allowances and credits can be revised in response to the assessment. If necessary, it could be decided to withdraw an allowance or credit and base a tax assessment on the actual costs or benefit. A policy review could lead to all allowances and credits being evaluated together by means of, for example, a quick scan every three or five years. The evaluation would ask whether the allowances and credits reflected the average economic value, whether circumstances had permanently changed, whether tax laws and regulations had been amended and whether using allowances and credits was more efficient than using the actual sums involved.
Why did we audit tax allowances and credits?
An insight into and overview of the allowances and credits in the tax system can inform the further debate of the reform of the tax system. The overview can enable parliament to determine whether the current allowances and credits are applied appropriately and achieve the intended policy and efficiency goals. The desirability of allowances and credits is closely related to whether they are justified by the efficiency gains.
The audit was published and presented to the House of Representatives on Wednesday 26 June 2019.