Tax expenditures are tax discounts or exemptions that further the policy aims of government. They cover everything from the zero rate of VAT on children’s clothes to inheritance tax relief. As he contemplates next week’s Budget, the Chancellor may be regretting that hasn’t developed a method for considering the effectiveness of tax expenditures, and potentially finding savings. With pre-election pledges limiting his options for reducing general expenditure, or raising revenue through tax rate changes, the Chancellor could do with a third front. The chart below depicts those tax expenditures costing more than £1bn annually and reveals one of the reasons why tax expenditures might not get the attention they deserve: they often relate to politically sensitive issues. The attempt (abandoned last week) to reform pension tax relief was a sign that the Chancellor is willing to consider ways of raising revenue by curtailing tax expenditures, despite this political sensitivity. But the haphazard way in which the reform was developed: without substantive consultation, leaked to the press and then dropped in the week before the Budget, speaks to a lack of established process within the Treasury for this type of reform. If the Chancellor wants to get serious about tax expenditures, […]

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