Evaluation of Tax Concessions

Tasks

Tax benefits (or ‘tax expenditures’) are important, broadly applicable and potentially efficient instruments for creating incentives for private activities and for promoting numerous policy objectives (for example in transport policy, housing policy, environmental policy and many sectoral or horizontal areas of economic policy). At the same time, because they (a) are not included in government budgets, (b) have a tendency towards longevity and (c) are susceptible to deadweight effects, tax benefits must be monitored with particular vigilance as part of an increasingly results‐oriented and evidence‐based governance process.

According to the guidelines for government subsidies ('erweiterte subventionspolitische Leitlinien') of the German federal government, all government grants therefore need to be evaluated on a regular basis. This applies to direct subsidies as well as tax benefits. To obtain a scientific basis for conducting this governance task, the Federal Ministry of Finance commissioned a large‐scale evaluation of 33 German tax benefits. Conducted jointly by researchers at the FiFo Institute for Public Economics at the University of Cologne (team leader), the Leibniz Centre for European Economic Research (ZEW), the Ifo Institute, and the Fraunhofer Institute for Applied Information Technology (FIT), the study uses a standardized framework to evaluate tax subsidies that add up to a total of roughly €7.4 billion. The aim is to quantify and to evaluate the tax benefits with respect to several factors including their effectiveness, efficiency, transparency and sustainability. The evaluation examines the largest tax benefits that had previously not been given an external evaluation, together with other closely‐related tax benefits. As a result, the evaluation covers a very broad and heterogeneous field.

Methods

The aim of the project is to quantify and evaluate 33 tax benefits, which are divided into five groups. For each group, a final report is prepared. In addition, a concise evaluation sheet ('Subventionskennblatt') is published for each tax benefit. The evaluation sheet outlines the legal basis, provides background information on the quantitative analyses and discusses the main results of the evaluation with regard to (1) relevance of the benefit’s objective, (2) effectiveness, (3) sustainability, (4) instrumental suitability and (5) transparency and monitoring, as well as policy recommendations. In order to ensure the consistency of the evaluation, a uniform evaluation scheme is applied.

Data and other sources

The data for the quantitative analyses are provided by Fraunhofer Institute.

Results

Six measures received an overall rating of “good”. These benefits accounted for a total volume of €2.7 billion in 2018. Seventeen tax benefits accounting for a total volume of €2.9 billion were rated as "sufficient". This latter rating intentionally uses the same term that is used in schools. It is meant to indicate that the benefit in question “passed” the evaluation but that there is significant room for improvement. Ten tax benefits accounting for a total volume of €1.8 billion received an overall rating of “weak”. These tax benefits were found to fall far short of their expected objectives and therefore to require urgent fixing: such measures must be redesigned completely or else discontinued. The evaluation findings and concomitant recommendations are pooled in a compendium report covering all 33 tax benefits. Subreports were also compiled for each of the five evaluation categories. All of these reports provide separate, standardised 2‐3 pages summaries for each tax benefit under evaluation.