There are many types of tax subsidies. For instance, there are labor, export, consumption, and infrastructure tax subsidies. Tax subsidies are normally created by governments. They are created to help businesses and individuals that have difficulty operating or competing in a particular market or industry. A government will give businesses or individuals tax subsidies by providing tax credits, by lowering taxes, and by issuing tax exempt numbers. Read on to learn more about how tax subsidies work.
Tax Credits
First, governments assist businesses and individuals with tax subsidies by providing tax credits. Tax credits are probably the most commonly used tax subsidy. For example, a US based Steel Company may get tax credits which may help it compete with lower cost China based steel that is imported in the US. The federal government can pass a law that allows tax deductions on expenses and the steel products that are made in the US.
Lower Tax Rates
Next, governments assist businesses and individuals with tax subsidies by providing a lower tax rate. Most local governments have a tax rate schedule for all businesses. The rates are sometimes based on total sales revenue for each year. For instance, a small grocery store owner may be paying 15 percent in taxes on every $100.00 in sales. A local government can approve legislation that will reduce the payment to 7 percent so that the store owner can compete with larger stores in the city. This method is sometimes called altering the tax rate.
Tax Exempt Status
Then, governments assist businesses and individuals with tax subsidies by providing organizations with a tax exempt number. State lawmakers write laws that make some organizations become exempt from taxes. However, there are very strict rules that govern these non-profit hospitals. To keep their non-profit status, many hospitals treat the poor at no cost, and make charitable contributions to the communities they serve. They also provide food, clothing, and shelter to the elderly. Community based hospitals and clinics receive subsides to reduce and eliminate taxes.
The Bottom Line
Finally, governments assist businesses and individuals with tax subsidies by providing tax credits, by providing lower tax rates, and by providing tax exempt numbers to organizations. These are only a few methods that are used to implement tax subsidies. This is a brief overview of how tax subsidies work. There are many ways to debate this issue because it is good in some ways and it may seem unfair in other ways.