Tax expenditures are exceptions made to the normal basic structure of taxation, the so-called benchmark tax system, by which a certain business or a group of taxpayers is directly or indirectly supported. In practice, tax expenditures refer to tax exemptions, tax deductions, lower tax rates and other comparable means. Tax expenditures are defined in tax legislation.
Tax expenditures are not usually visible in expenditure side of the budget, as are direct subsidies, but they are shown as lost tax revenue. Tax expenditures distributed through the tax system have been regularly monitored and reported in the budget proposal and in the final central government accounts. The listing of tax expenditures is published yearly at the same time as the budget proposal is submitted to Parliament.
In most cases, it is not possible to calculate the exact amounts of tax expenditures, so their monitoring is based on estimates. Moreover, for certain tax expenditures, the lack of available data makes it impossible to estimate the amount at all. When examining tax expenditures, it should also be taken into consideration that the removal of a tax expenditure does not necessarily increase tax revenue by an equivalent amount. Some of the tax expenditures overlap, so they have an effect on each other’s size. The methods for calculating tax expenditures also vary. Moreover, the effects of tax expenditures on prices and taxpayers’ behaviour have not been considered in the calculation, and it is therefore difficult to assess the final effects of the removal of an individual tax expenditure. For these reasons, there is no sense in calculating total tax expenditures, nor can they be straightforwardly compared in all respects from year to year or with one another.
Nevertheless, it is important to monitor tax expenditures, because they are used to channel significant public support to different targets. Tax expenditures also narrow the tax base and often complicate the tax system.
Tax expenditure calculations are based on the benchmark tax system. The calculation methods are mainly described in the VATT Institute for Economic Research's preparatory report Tax expenditures in Finland in 2009. In addition, the annual reporting of tax expenditures is supported by a steering group appointed by the Ministry of Finance, which monitors, evaluates and develops tax expenditure reporting. The steering group takes a stand on how changes in the tax basis are taken into account in determining and calculating tax expenditures. When new tax expenditures arise, the steering group decides on their calculation principles and, where necessary, assesses and develops the calculation methods for the current tax expenditures.
The working group on tax expenditures decides on changes to the calculation of tax expenditures. Documents of the working group on tax expenditures are available below.
- Tax expenditures in 2020-2022 (in Finnish)
- Tax expenditures in Finland in 2009 (in Finnish)
- Decision on appointing a working group on tax expenditures reporting (in Finnish)
- Changes to tax expenditures for energy taxation (in Finnish)
- Tax expenditures for removal costs paid by the employer (in Finnish)
- Change in the regulatory system of energy taxation in 2011 (in Finnish)