Tax expenditures and the fiscal contract – TEFISCON

The programme is structured into work packages.
Work Package 1: Use and effect of tax expenditures on tax compliance
WP1 analyses how VAT tax expenditures affect tax compliance and tax morale. It provides an analysis of the use of tax expenditures in low- and middle-income countries based on the GTED and GTETI databases. The methodology is based on cross-sectional or panel regressions, using data from the GTED database on tax expenditures and Afrobarometer surveys.

Work package 2: Accountability
WP2 (IDOS) focuses on the political economy of tax expenditure regimes. It seeks to determine how the use of tax expenditures affects short-term budget negotiations and long-term institutional agreements based on the case study of Zimbabwe.
Work package 3: Perceptions of tax expenditures
LT3 explores how tax expenditures affect perceptions of tax fairness and tax compliance. One component (CERDI) analyses how the use of VAT tax expenditures affects consumers' perceptions of tax fairness. Field surveys are conducted with households in Uganda and Morocco.
Work package 4: Attitude changes (perception/mindset)
WP4 examines how targeted information on the real effects of tax expenditures can change taxpayers' perceptions. More specifically, it analyses, for a dozen consumer products consumed by all deciles, whether information on the actual beneficiaries (by quintile) of tax expenditures leads to a change in attitude (change in perception/mentality) towards exemptions on these products and the underlying tax contract. First, we measure, by quintile, the beneficiaries per quintile of VAT exemptions for the selected products (actual effects of VAT exemptions), based on microdata from the tax administration and the National Institute of Statistics and Applied Economics. We then conduct a randomised field experiment by applying treatments consisting of different information. There is a control group and three treatment groups. Can misperceptions be changed, and is it then possible that support for VAT exemptions will be less strong, especially for those that do not achieve their initial objective? The results of this experiment will have important economic policy implications for developing a strategy to reduce exemptions.
Work package 5: Synthesis
WP5 brings together contributions from different conceptual, methodological and geographical perspectives to produce synthesis papers for academic debate and the general public.

The project team ensures a high and sustained level of interaction between the two partners. In total, a workshop held every three months serves as a platform for internal exchanges and the joint organisation and coordination of field research.
The studies produced as part of the fieldwork will be published in the form of working papers with the active contribution of the associated partners. In addition to English, the project aims to produce publications in Spanish and French, as this facilitates the assimilation of scientific knowledge in Africa and Latin America.
The TEFISCON project brings together knowledge and expertise in political science (IDOS) and economics (CERDI/UCA). While the research methodologies used by the two groups are similar, there are significant differences in their approaches to the research topic. First, while IDOS deals with tax expenditures related to direct taxes on businesses, CERDI/UCA focuses on VAT tax expenditures. This complementary division of labour, which was decided upon from the outset, leads to differences in treatment. Tax expenditures related to direct taxes are, by nature, more varied and affect a more heterogeneous range of economic agents (large companies, medium-sized companies, small companies, micro-enterprises); they can often be better addressed in the context of a quantitative analysis. Conversely, VAT tax expenditures are simpler because they relate either to total exemptions (the product is exempt) or partial exemptions (application of a reduced rate); taxpayers are more homogeneous because they are end consumers, even though, as the analysis must take into account, consumers in the top decile behave differently from those in the bottom decile.

Field surveys will be conducted in 2025, with initial results expected by the end of that year for Morocco and during the first quarter of 2026 for Uganda.

Depending on the work package, the objective is to produce a minimum of 2 (WP1 and WP2) to 3 (WP3, WP4, WP5) research articles per work package. In addition, LT5 aims to produce summary documents for authorities, parliamentarians, the media and those involved or interested in the issue of tax expenditures. In order to ensure wider dissemination, these popular articles will be published in English, French and Spanish.

The project aims at shedding light on a topic that has not been widely researched so far: How does the use of tax expenditures in low- and middle-income countries impact on the fiscal contract?
The notion of a “fiscal contract” between the state and the taxpayers (both citizens and businesses) refers to an implicit agreement that links individual tax compliance and the distribution of the tax burden within a society to public service delivery and access to political decision-making. The concept has proven to be highly relevant to understand patterns and dynamics of taxation in countries worldwide, including low- and middle-income countries.
Tax expenditures are preferential tax treatments (such as reduced rates, exemptions, etc.) for specific taxable activities or groups of taxpayers. They often have a strong impact on the distribution of the tax burden within a given society, both in terms of horizontal equity (unequal taxation of similar activities or assets) and vertical equity (a shift of the tax burden in favour of the wealthier segments of society) and also a sizeable impact on the fiscal space of governments. At the same time, tax expenditures tend to make the tax system more complex, and they are set up or maintained by means of decision-making processes that are often less transparent than ordinary budget decisions or tax reforms.
So far, little is known about the impact of tax expenditures on the fiscal contract, partly due to lacking information on tax expenditures, particularly in low- and middle-income countries. The project will generate new evidence on the specific role tax expenditures play for fiscal contracts and the underlying causality paths that drive this relationship. Further, it will broaden the fiscal contract debate, which has focused mainly on individual taxpayers, by incorporating an additional focus on government-business relationships. The project will be structured in five work packages (WPs).
WP 1 analyses how tax expenditures are used for distributional purposes, with a specific focus on aggregate macro-level analysis. WP 2 explores how the use of tax expenditures affects fiscal bargaining in a specific country, Zimbabwe. WP 3 studies how the use of tax expenditures affects perceptions of tax fairness and tax compliance, combining macro-level research with in-depth case studies in Colombia, Morocco and Uganda. WP 4 analyses how information on the real distributional effects of tax expenditures leads to shifting attitudes, based on randomised information treatment testing in a specific case, Morocco. Finally, WP 5 will bind the above-mentioned work streams together in order to address the overarching research question, produce synthesising papers and engage with a wider public on the key messages derived from the project.