||The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. (September 2013)|
|An aspect of fiscal policy|
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 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.
Tax Foundation categorizes US federal tax incentives into four main categories, listed below:
- 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. Site selection consultants negotiate these incentives, which are typically specific to the corporate project the state is recruiting, rather than applicable to a broader industry. Examples include:
- Corporate income tax credit
- Property tax abatement
- Sales tax exemption
- Payroll tax refund
- "Who Benefits from Corporate “Loopholes”?". The Tax Foundation. Retrieved 8 September 2011.
- "Composition of Corporate Tax Expenditures". The Tax Foundation. Retrieved 8 September 2011.
- "Site Selection Process". Greyhill Advisors. Retrieved 20 October 2011.
- "Site selection consultants". Retrieved 4 November 2011.
- "Economic Development Incentives". Greyhill Advisors. Retrieved 8 September 2011.