Wikis > Patterns of financial tool use: from visible to invisible instruments

There have been some interesting developments in the patterns of use found in this very old set of instruments and some interesting tool dynamics well worth additional study. While most economic theories push for visible taxes and incentives in order to promote virtues and discourage vice, the reality in most countries is a trend towards more and more hidden financial tools – especially tax-based ones which are difficult to trace and quantify.

Howard (1993; 1995; 1997; 2002), for example, has estimated that the US welfare system in the mid-1990s included $896 million in direct expenditures but also $437.9 million in tax expenditures (1995: 26).4 He estimated tax expenditures in the USA grew by an average 4.8 per cent over the period 1967–95 versus 5.9 per cent for direct expenditure on income security, health, and housing, but over the period 1980–90 grew at a faster rate than direct expenditures (3.9 versus 3.1 per cent annual growth) with a similar pattern over the period 1975–95 (the ‘Republican era’ in US politics) in what was ostensibly a deficit cutting/free trade era of market-based governance.

This expansion has been fuelled by shifts in implementation preferences owing a great deal to the assessment criteria of visibility, intrusiveness, automaticity and cost. The tax system is already in place, along with a collections and enforcement apparatus, so changes to create new incentives or disincentives are largely matters of administration. There is some risk involved in their use, though, as it is often difficult to control whether or not a recipient will actually do what a government wants them to with the transferred funds. Besides problems with black and grey markets, market distortions and international prohibitions associated with this tool, agents can also often simply take the money offered with few results in terms of achievement of a principle’s intentions. Avoiding such principle–agent problems can involve costly and visible enforcement agencies, which negates some of the advantages of the use of these instruments in contemporary policy designs.

With respect to procedural financial tools, a pattern in many countries and sectors has been for their increased use over the past thirty years in the effort to enhance and control the operation of interest articulation and aggregation systems in many sectors. This is compatible in many jurisdictions with pre-existing corporatist modes of governance but many groups in other governance modes now receive direct funding from governments while others are funded indirectly through the tax system which allows for transfers of funds to non-profit and charitable groups either directly or through foundations (Pross and Stewart 1993; Phillips 2001; Sharpe 2001; Carmichael 2010; Wood and Hagerman 2010).5

In terms of Linder and Peters’ criteria, it should be noted that the use of such procedural financial tools is generally very inexpensive and can be precisely targeted, making them a preferred tool for government managers eager to control their policy environments. There are some risks involved in such activities though, since outside funding promotes oligarchy/formalization in voluntary associations and can lead to discontent both among ‘co-opted’ group memberships as well as from groups which do not receive funding (Saward 1990 and 1992; Lowndes and Skelcher 1998; Smith 2005a; 2005b). Ideological predispositions towards ‘free association’ in deliberative democratic practices, too, are jeopardized by government manipulation of interest articulation systems, which can lead to further difficulties for governments who engage in this practice in a substantial way, although the lack of visibility and accountability of such practices reduces this concern (Beetham 1991; Phillips 1991; Stanbury 1993; Maddison 2005; Carmichael 2010).