Tax incentive

The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. You may , discuss the issue on the talk page, or create a new article, as appropriate. (September 2013) (Learn how and when to remove this template message)

Part of a series on
Taxation
An aspect of fiscal policy
hide Policies Government revenue Property tax equalization 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
show Economics General Theory Price effect Excess burden Tax incidence Laffer curve Optimal tax Theories Optimal capital income taxation Distribution of Tax Tax rate Flat Progressive Regressive Proportional
show 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
show Noncompliance General Tax avoidance Tax evasion Tax resistance Tax shelter Smuggling Black market Unreported employment Corporate Tax inversion Transfer mispricing Base erosion and profit shifting (BEPS) Double Irish Dutch Sandwich Single Malt CAIA/Green Jersey Locations Tax havens Corporate havens Offshore financial centres (OFCs) Offshore magic circle Conduit and Sink OFCs Financial centres Financial Secrecy Index Major examples Ireland as a tax haven Ireland v Commission Leprechaun economics Liechtenstein tax affair Luxembourg Leaks Offshore Leaks Paradise Papers Panama Papers Swiss Leaks United States as a tax haven Panama as a tax haven
show Types Direct Indirect Per unit Ad valorem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel 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) Wealth
show International Financial transaction tax Currency transaction tax European Union Common Consolidated Corporate Tax Base (CCCTB) Minimum corporate tax rate Tobin tax Spahn tax Tax equalization Tax treaty Permanent establishment Transfer pricing European Union FTT Foreign revenue rule
show Trade Custom Duty Tariff Import Export Tariff war Free trade Free-trade zone Trade agreement ATA Carnet
show Research Academic Mihir A. Desai Dhammika Dharmapala James R. Hines Jr. Ronen Palan Joel Slemrod Gabriel Zucman Advocacy groups Tax Justice Network (TJN) Institute on Taxation and Economic Policy (ITEP) Oxfam (UK) Tax Foundation (US) Tax Policy Center (US)
show Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
show By country All Countries List of countries by tax rates Tax revenue to GDP ratio Tax rates in Europe Individual Countries Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Brazil Bulgaria BVI Canada China Colombia Croatia Denmark Finland France Germany Greece Hong Kong Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Morocco Namibia Netherlands New Zealand Norway Pakistan Palestine Peru Philippines Poland Portugal Russia Singapore South Africa Sri Lanka Sweden Switzerland Taiwan Tanzania United Arab Emirates United Kingdom United States Uruguay
Business portal  Money portal
v t

A tax incentive is an aspect of a country's tax code designed to incentivize or encourage a particular economic activity by reducing tax payments for a company in the said country.

Tax incentives can have both positive and negative impacts on an economy. Among the positive benefits, if implemented and designed properly, tax incentives can attract investment to a country. Other benefits of tax incentives include increased employment, higher number of capital transfers, research and technology development, and also improvement to less developed areas. Though it is difficult to estimate the effects of tax incentives, they can, if done properly, raise the overall economic welfare through increasing economic growth and government tax revenue (after the expiration of the tax holiday/incentive period). However, tax incentive can cause negative effects on a government's financial condition,^[1] among other negative effects, if they are not properly designed and implemented.^[2]

There are four typical costs to tax incentives:

• resource allocation costs
• compliance costs
• revenue costs
• corruption costs.

Resource allocation refers to lost government tax revenue resulting from the tax incentive. The second cost refers to the situation when the tax incentives lead to too much investment in a certain area of the economy and too little investment in other areas of the economy. Revenue cost is associated with enforcing the tax incentive and monitoring who is receiving the incentive and ensuring they are properly deserving of the incentive. Therefore, the higher and the more complex the tax incentive, the higher the compliance costs because of the larger number of people and firms attempting to secure the tax incentive. The final cost is similar to the third in that it relates to people abusing the tax incentive. Corruption occurs when there are no clear guidelines or minimal guidelines for qualification.^[3]

According to a 2020 study of tax incentives in the United States, "states spent between 5 USD and 216 USD per capita on incentives for firms."^[4] There is some evidence that this leads to direct employment gains but there is not strong evidence that the incentives increase economic growth.^[4]

Disambiguation[]

Many "tax incentives" simply remove part of, or all the burden of the tax from whatever market transaction is taking place. That is because almost all taxes impose what economists call an excess burden or a deadweight loss^{[citation needed]}. Deadweight loss is the difference between the amount of economic productivity that would occur without the tax and that which occurs with the tax.

For example, if savings are taxed, people save less than they otherwise would. If non-essential goods are taxed, people buy less. If wages are taxed, people work less.^{[citation needed]} Finally, if activities like entertainment and travel are taxed, consumption is reduced.

Sometimes, the goal is to reduce such market activity, as in the case of taxing cigarettes. However, reducing activity is most often not a goal because greater market activity is considered to be desirable.

When a tax incentive is spoken of, it usually means removing all or some tax and thus reduce its burden.

Pseudo-incentives[]

Regardless of the fact that an incentive spurs economic activity, 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. Such "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.

Another form of an individual tax incentive is the income tax incentive. Though mostly used in transitioning and developing countries, usually correlating with insufficient domestic capita, the income tax incentive is meant to help the economic welfare of direct investors and corresponds with investing in production activities and finally, many times is meant to attract foreign investors.^[5]

These incentives are introduced for various reasons. Firstly, they are seen to counterbalance investment disincentives stemming from the normal tax system. Others use the incentives to equalize disadvantages to investing such as complicated laws and insufficient infrastructure.^[5]

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.^[6]

The Tax Foundation categorizes US federal tax incentives into four main categories, listed below:^[7]

• 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 very often directed at individual companies involved in a corporate site selection project.^[8] Site selection consultants^[9] negotiate these incentives, which are typically specific to the corporate project the state is recruiting, rather than applicable to a broader industry. Examples include the following:^[10]

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

List of largest US tax incentive deals[]

• Washington: Boeing, $8.7 billion until 2040, partly for the 777X^[11]
• New York: Alcoa, $5.6 billion
• Washington: Boeing, $3.2 billion
• Oregon: Nike, $2 billion
• New Mexico: Intel, $2 billion
• Louisiana: Cheniere Energy, $1.7 billion
• Pennsylvania: Royal Dutch Shell, $1.65 billion over 25 years^[12][13] for the Pennsylvania Shell ethylene cracker plant
• Missouri: Cerner Corp., $1.64 billion
• Michigan: Chrysler, $1.3 billion
• Nevada: Tesla Gigafactory 1, $1.25 billion over 20 years^[14]
• Mississippi: Nissan Canton, $1.25 billion

Historical preservation tax incentive[]

Not all tax incentives are structured for individuals or corporations, as some tax incentives are meant to help the welfare of the society. For example, the historical preservation tax incentive. The US federal government pushes, in many situations, to preserve historical buildings. One way the government does so is through tax incentives for the rehabilitation of historic buildings. The tax incentives to preserve the historic buildings can generate jobs, increase private investment in the city, create housing for low-income individuals in the historic buildings, and enhance property values. Currently, according to the Tax Reform Act of 1986, there are two major incentives in this category. The first incentive is a tax credit of 20% for rehabilitation of historic structures. A historic structure is defined as a building listed in the National Register of Historic Places or a building in a registered historic district, acknowledged by the National Park Service. The second incentive is a tax credit of 10% for rehabilitation of structures built before 1936 but are considered non-residential and non-historical.^[15]

Impact[]

According to a 2020 study, tax competition "primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location."^[16] A 2020 NBER paper found some evidence that state and local business tax incentives in the United States led to employment gains but no evidence that the incentives increased broader economic growth at the state and local level.^[17]

A 2021 study found that multinational firms boosted wages and employment in localities, but that the surplus that the firms generated tended to go back to them in the form of local subsidies.^[18]

See also[]

• Taxation in the United States
• Tax exemption
• Tax competition
• Texas Tax Code Chapter 313

References[]

External links[]

• "Explore Government Subsidies". The New York Times. 1 December 2012. Retrieved 6 June 2017.