What are tax expenditures? What are their strengths and weaknesses?

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  1. What are tax expenditures? What are their strengths and weaknesses?
Definition: Tax expenditures or tax breaks are revenue losses attributable to tax provisions. According to (OEDC, 2010) “tax expenditures are provisions that let certain groups of people, such as small businessmen, retired people or working mothers, or those who have undertaken certain activities, such as charitable donations, to pay less in taxes”. Tax expenditures often result from the use of the tax system to promote social goals. In addition, tax expenditure reflects the ways in which governments spend money indirectly, through special provisions in the tax code (Howard, 2003). Tax expenditures include credits, deductions, preferential tax rates, and deferrals of tax liability (Howard 2102). Tax expenditures can take many forms. For instance: refundable tax expenditures at The US are the earned income tax credit (EITC), the child tax credit (CTC), and Health Coverage Tax Credit (HCTC). Tax expenditures strengths: I consider that tax expenditures have three main strengths: 1) Tax expenditure concept is broadly accepted among public finance and specialists as well (Howard 2003). 2) Most budget experts view tax expenditure as a useful tool in managing the size and scope of the federal government (Burman, 2003). According to Howard, tax expenditure is good tool for seeing “The hidden welfare state.” 3) From the point of view of moderates and conservatives, tax expenditures suggest greater possibilities for social policy expansion, they are less intrusive and less bureaucratic, and promote individual choice (Halfmann, Lecture Notes, 2014). Tax expenditures weaknesses: From my point of view tax expenditures have three main weaknesses: 1) Unfair distributional effect. According to Howard (2007, 2012) in the case of The United States tax break significantly aggravates inequalities of income and wealth (Howard, Tax Expenditure: What They Are and Who Benefits, 2012). Most U.S tax expenditures favor high earners. Tax relief is most valuable to people who have high taxes (Halfmann 2014). For instance: mainly tax expenditures like the home mortgage interest deduction benefit primarily the middle and upper-middle classes (Howard 2007). Another example that shows this disparities is the fact that affluent workers are more likely to work for companies that offer pension and health benefits subsidized by taxpayers, while many low-wage workers work at small businesses that do not offer benefits and hence do not enjoy this tax break (Howard 2007). 2) Limited transparency, tax expenditures are tax provisions that are not structural features of the income tax or necessary to measure income accurately. Therefore is hard for policy-makers to control (Halfmann, Lecture Notes, 2014) 2) Tax expenditures reflect political power.As I said before, U.S tax expenditures favor high earners. Therefore the most interest to maintain this scenario are employers, insurers, health care industry who participate directly or indirectly from the benefit of tax expenditures. Tax expenditure is pushed by providers not beneficiaries (Halfmann, Lecture Notes, 2014). These providers play an important role in support political campaigns (Howard, 2007). 3. What are the main differences between the social welfare systems of the United States and Sweden? From my point of view, there are three main differences between the social welfare systems of the United States and Sweden. These are: 1) Spending as proportion of GDP 2) Welfare regime, and 3) Gender equality.
  1. Spending as proportion of GDP.
The public social expenditure as a percentage of GDP is 15.8% at The U.S. and 35.7% at Sweden. Considering tax expenditure, the relative size the American welfare state is 16.5% and at Sweden 28.5%. Therefore, under the last comparison Swedish welfare states is 1.7 times larger than the U.S. (Howard, 2003)
  1. Welfare regime.
According to Olsen (2002) The United States of America has a liberal welfare regime, where the logic of the market and minimal state intervention are highlighted. It is decentralized and tax expenditure plays an important role. The U.S. as a liberal welfare state has very basic social safety net. In general liberal social programs are reactive rather than preventive. Liberal welfare states are characterized by the predominance of social assistance. This is mainly direct cash transfers or social services that use some income test to define eligibility or in some social programs the recipients for receive the benefit must be working. A good example of that is Earned Income Tax Credit. In contrast, Sweden has a social democratic welfare regime. This regime tries to provide optimal condition than only to provide basic social safety net. Their objective is not only to help the poor. They try to abolish poverty and they fight for a more egalitarian distribution of the income. In this context full employment, well-paying job, active labor market policy, universal health care services, sickness insurance, safe working environment, generous unemployment insurance, and decent retirement are considered basis right for the residents among others (Olsen, 2002), (Halfmann, Lecture Notes, 2014). In addition Swedish welfare has other specific programs for target population such as elderly, disabled, substance abusers, refugees and immigrants (Olsen, 2002) Furthermore, Swedish welfare has high decommodification, making people less reliant on on labor market for subsistence (Halfmann, Lecture Notes, 2014).
  1. Gender equality.
There is a huge difference how The U.S and Swedish welfare addresses gender equality in its policies. At The U.S. exists a difference between gender roles. For instance: in some areas men are getting paid more than women, there are employer discrimination in relation to women (Mommy tax) (Halfmann, Lecture Notes, 2014). In addition, Orloff, (2002) states that The U.S. welfare has eliminated social rights and caregiving. For example: poor single mother has to work in order to receive the benefits of EITC program, but they cannot take care for their children full time. According to (Bennhold, 2010) there is gender equality in Sweden and it is fair for both women and men. For instance, it exists: job protection for non-working mothers until child is school-age 2) Paid pregnancy and Swedish fathers are mandated to take parental leave 2) and also it exists tax relief for working parents, especially single ones (Halfmann, Lecture Notes, 2014) References Bennhold, K. (2010, June 9). In Sweden, Men Can Have It all. New York Times. Burman, L. (2003). Is the Tax Expenditure Concept Still Relevant? National Tax Journal, 613-27. Halfmann, D. (2014). Social Policy [PowerPoint slides, Lecture Notes]. Howard , C. (2003). Is the American Welfare state Unusually Small? Political Sciences and Politics , 411-416. Howard, C. (2007). The Haves and the Have-Lots. Democracy Journal, 48-58. Howard, C. (2012). Tax Expenditure: What They Are and Who Benefits. Cambridge: Scholars Strategy Network. OEDC. (2010). Tax Expenditures in OECD Countries. Paris: OECD. Olsen, G. (2002). The Politics of the Welfare State: canada Sweden and the United States. Oxford: Oxford University Press. Orloff, A. (2002). Explaining US welfare reform: power, gender, race and the US policy legacy. Critical Social Policy, 96–118.
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