Tax subsidies can be thought of as ‘reliefs’ given to certain sectors or entities in the economy in order to promote a certain pattern of economic behavior which aligns the economy with the government policies. Tax subsidies may be granted in relation to different aspects of the economy such as labor, land or capital and could vary from time to time depending on the economic changes as well as based on government policy decisions.
When the government grants a tax subsidy, it invariably points towards sharing of certain costs between the private sector entity and the government. Thus, it hopes to attract more investment, production to cater the demand or else promote consumer buying in order to sustain the industry or else to ease the consumer burden. In whatever circumstances, the tax subsidy can be given in many different ways using different modalities.
There are four main ways in which tax subsidies could be granted and these include, providing tax credits, altering the taxable basis, altering the taxable entity or else through altering the tax rate.
In tax credit, portions of certain expenditure may get deducted from the actual taxable income. When it comes to altering the tax rate, certain activities or entities may be excluded from certain taxes while in some instances the tax rate itself may be reduced. In any event, the net tax rate relevant to an organization would lessen and therefore would give them an advantage in pricing their products or else meeting with the demand.
In instances where subsidies are provided through altering the taxable basis, government will redefine the activities which are included as the taxable basis and therefore will promote certain behaviors among individuals whom would want to reap the benefits of such subsidies. Finally, in case of providing subsidies through alteration of taxable entity, the government would designate avenues for organizations to consolidate the taxes by off-setting the income of one entity through the losses of another.
Although the provisions of tax subsidies are aimed at achieving designated economic growth or to promote healthy consumer behaviors towards the economy, it is considered a cost to the government. Thus, it is referred to as the ‘tax expenditure’ and many different methods are being utilized to perform this laborious calculation task. However, it should be realized that, values provided by various agencies in relation to tax expenditure may vary enormously between these agencies and there are many arguments against some of the measures used in calculating the same.