What Are Tax-Free Subsidies?

Tax Subsidies

• Tax-free subsidies make it possible for government to share the costs involved with strengthening a particular area within the economy. As national and state tax codes can change from year-to-year, tax subsidies result when governments change existing tax code to benefit certain sectors within the population. Tax subsidies can benefit any number of market sectors, some of which include energy, labor and real estate markets. Changes in the tax code can appear as exemptions, credits or deductions.
  
  

Function

• Governments operate according to planned policy objectives that target different areas within the economy. By subsidizing tax costs for individuals or businesses, governments attempt to promote particular policy objectives by stimulating economic activities within specific areas of the market. Tax code changes, such as the addition of credits, rate changes and taxable versus non-taxable activities, work to increase spending within certain areas by reducing the costs associated with particular activities. For example, tax-free subsidies within the energy market may allow homeowners to deduct or write-off energy-related home improvements. In effect, the likelihood of homeowners investing in energy improvements increases with an associated tax incentive.
  
  

Economic Activity

• Whenever a tax-free subsidy targets a particular area of the market, different effects appear within different levels of that market's sector. As tax subsidies work to stimulate economic activity, consumers benefit in the form of lower overall prices while product producers benefit from the higher profits made through increased sales. Employees who work to manufacture or produce a product may benefit through higher wages as companies take in more profits. From the government's perspective, it doesn't matter which level receives the subsidy as long as increases in economic activity coincide with the government's policy objectives.
  
  

Effects

• Tax-free subsidies create a tax savings for consumers and businesses while placing additional strain on the federal budget as government spending costs go up. Much like government grants for education and housing use federal funding, tax-free subsidies reduce the amount of tax revenue governments normally receive from a particular market sector. In order to compensate for reduced tax revenue, tax increases or new taxes may emerge within other areas of the economy. The method by which a government chooses to stimulate a market sector's activity also has a bearing on the amount of tax revenue lost. Methods that favor a large industry, such as oil and gas work with a larger tax base than say the solar cell industry. In effect, the larger the industry, the more the government has to spend in order to fund the subsidy.