Posted in Finance, Accounting and Economics Terms, Total Reads: 365
Definition: Tax Break
Tax break is a tax benefit granted to promote specific social and economic objectives. It is a reduction in the gross amount on which tax is calculated, which in turn reduces the fixed percentage of tax for the taxpayer.
Tax break is generally provided to encourage a particular commercial activity. It helps the taxpayers to avoid taxes through tax exemption, tax deduction or tax credit to invest the money into some other economic or social activity. It acts as a savings on a taxpayers’ liability.
Tax breaks motivate people to work efficiently and encourage new people to enter into the country’s existing work force as tax breaks increase the disposable income. It also gives firms the opportunity to invest more and thus contribute more to the country’s economy.
But the government can only afford to provide the tax breaks to its people if it cuts its spending or increase its borrowings. And this can be really difficult for the government. Providing tax benefits can even give rise to the rise of inequality in the society, because the major part of the government spending is focused towards the lower income segment of the country. And for goods like, cigarettes and alcohol where taxes play an important role in lowering the consumption, might increase their consumption in the society. Also, since tax structure is designed to accomplish the greater good of the country, tax benefits can make the people have this perception that the government is not taking the necessary steps for developing the economy. All these reasons have made the economists skeptical about tax incentives and support considerable tax rates.
Example: US government decided that home ownership of its country people works as a boon to the country’s economy, and thus it provides a tax benefit by relieving the interest on the home mortgage loans from one’s taxable income.