Posted in Finance, Accounting and Economics Terms, Total Reads: 303
Definition: Tax Free
Tax free refers to those goods or financial products which are not taxed and also have earnings that are not taxed. Thus when goods or financial products that are not taxable are offered. The tax free status of such goods or funds are able to incentivize individuals and also the business entities to increase spending or investment, thus resulting in economic stimulus. Governments often provides a tax break for investors purchasing government bonds so that it is ensured that enough funding is available for upcoming expenditure projects.
Investors gets income which is tax free. Since income is tax free the investor gets the full interest amount in his hand. On the other hand government is able to generate the required money flow in the money market. It helps to give a boost to the economy in bearish period.
In case of excess money supply, the excess money can lead to higher investment and higher income, resulting in inflation. Thus the tax free instruments need to be kept in check. Also tax free instruments reduce the revenue source of the government. It might increase the current account deficit of the government.