Tax incentive

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty European Union FTT
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria Canada China Colombia France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Namibia Netherlands New Zealand Norway Pakistan Palestinian territories Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay

A tax incentive is an aspect of a country's tax code designed to incentivize, or encourage a particular economic activity.

Disambiguation

Many "tax incentives" simply remove part or all the burden of the tax from whatever market transaction is taking place. This is because almost all taxes impose what economists call an excess burden or a deadweight loss. Deadweight loss is the difference between the amount of economic productivity that would occur absent the tax and that which occurs with the tax imposed

This is illustrated by the following examples. If savings are taxed, people save less than they otherwise would. Tax non-essential goods and people buy less. Tax wages and people work less. And taxing activities like entertainment and travel reduces their consumption as well. Sometimes the goal is to reduce such market activity as in the case of taxing cigarettes. But reducing activity is most often not a goal because greater market activity is considered desirable.

When a tax incentive is spoken of, it usually means removing the tax (or a portion thereof) and thereby lessening the burden, really removing a disincentive. To understand how removing a tax increases the level of market exchange by removing the excess burden, it is possible to make an analogy with the use of carrots and sticks.

Pseudo Tax Incentives

Regardless of the fact that an incentive spurs economic activity. Again, many use the term to refer to any relative change in taxation that changes economic behavior. Such pseudo-incentives include tax holidays, tax deductions, or tax abatement. These "Tax incentives" are targeted at both individuals and corporations.

Individual Incentives

Individual tax incentives are a prominent form of incentive, and include deductions, exemptions, and credits. Specific examples include the mortgage interest deduction, individual retirement account, and hybrid tax credit.

Corporate Tax Incentives

Corporate tax incentives can be raised at federal, state, and local government levels. For example, in the United States, the federal tax code provides a wide range of incentives for corporations, totaling $109 billion in 2011 according to a Tax Foundation Study.^[1]

Tax Foundation categorizes US federal tax incentives into four main categories, listed below:^[2]

Tax exclusions for local bonds valued at $12.4 billion.
Preferences aimed at advancing social policy, valued at $9 billion.
Preferences that directly benefit specific industries, valued at $17.4 billion.
Preferences broadly available to most corporate taxpayers, valued at $68.7 billion.

Corporate tax incentives provided by state and local governments are also included in the US tax code, but are many times very often directed at individual companies involved in a corporate site selection project.^[3] Site selection consultants^[4] negotiate these incentives, which are typically specific to the corporate project the state is recruiting, rather than applicable to a broader industry. Examples include:^[5]

Corporate income tax credit
Property tax abatement
Sales tax exemption
Payroll tax refund

References