Availing itself of tax expenditures, the government can decide via tax allowances to encourage the development of a specific branch of the economy, an activity or a category of taxpayer. Through this, it is consciously assenting to a reduction of its own revenue. Since tax expenditures are potential government revenue, which the government has consciously renounced, it would be useful to know the total amount of them and who they really affect. Tax expenditures mean that a given item is exempted from the tax base. In this manner, part of the income does not enter the process of income tax calculation at all. Failure to include a certain item into the tax base creates a loss for the government treasury. Such an item constitutes a tax expenditure, or a loss of revenue of the national treasury.
In the world at large, tax expenditures assume various forms, from tax privileges or reliefs, tax deductions or allowances, tax exemptions and various tax credits. The basic drawback of all tax reliefs is the lost tax revenue, which is particularly a cause for concern if tax evasion is based on various forms of borderline or straightforward abuse of reliefs.
The basic objective of this research was to determine the size, effects and character of tax expenditures in Croatia in the 2003-2005 period, by observing personal and corporate income tax, real estate transfer tax and added value tax.