Definition: A tax subsidy is an intentional reduction of the tax burden granted to certain business or industry to promote consumption or production. It is a benefit awarded by a government as an economic incentive.
What Does Tax Subsidy Mean?
Subsidies are an economic tool that helps the government to deal with certain market inefficiencies. A sudden catastrophic event such as a flood or an earthquake or an strategic approach taken to promote certain industry like construction or manufacturing are some of the reasons why governments issue tax subsidies.
These could be apply through a direct deduction of the income tax or a reduction in the tax levy established to certain imported goods or, in some cases, a deduction in a sales-related task. All these mechanisms reduce the tax burden of businesses allowing them to obtain a bigger profit. This benefit is often conditional to maintaining the production volume or certain price level.
Agricultural activities and some business development programs are a few of the frequent targets of such subsidies. Finally, they are often criticized by economists because of the damage they can cause to the competitive landscape of an industry.
Example
Jorge is a farmer living with his family in Baja California, Mexico. He has a big automated farm that produces corn, tomato and other vegetables. The local government is interested in raising Jorge’s farm production capacity and in order to do so they gave him a tax subsidy of 75% if he increased his production volume by 5% in 3 consecutive years.
The local government enforced this condition by establishing supervisors that will oversee production levels to guarantee that the subsidy is actually beneficial for the community. The purpose of this is to supply enough of these goods to the market to keep prices down, since inflation is starting to emerge within the place because of a recent flood that affected a considerable number of other farms.
