The term tax relief is widely used to refer to tax cuts, tax rebates, tax subsidies, tax breaks, and tax write-offs that reduce the amount of tax due or otherwise provide concessions to taxpayers. Usually, tax relief is targeted toward income and ownership taxes, consumption taxes, commodity taxes, and taxes on business establishments in apparent need of such financial makeups.
Tax relief is as old as modern-day government and is primarily born out of a government’s genuine concern to bridge the wide gap between low-income and high-income earners by exempting those earning below the national minimum income from paying tax. Tax relief is also often meant to protect local infant industries by giving them tax holidays so they can better compete with foreign companies. In addition, tax relief can be informed by the need to redirect the economy toward a path of balanced growth and development. In this light, tax relief can be a useful tool in the hands of economic planners who wish to effect necessary adjustments in development parameters so as to achieve projected development objectives.
Tax relief is premised on the belief that it will be used for policing the economy and for bridging the gap between local industry and foreign industry. In addition, tax relief is seen as having the effect of stabilizing an economy, since a rise in the tax rate is likely to encourage workers to work less, knowing full well that they will be taxed. Tax relief may also stimulate the economy by raising the aggregate level of savings and consequently investment.
Empirical evidence shows that tax relief is often granted to individuals and corporate organizations who are victims of natural disasters. Tax relief may also be granted to citizens of states involved in bilateral or multilateral trade agreements as concessions in response to their development needs. For example, third world countries such as Gambia and Nigeria have been granted tariff concessions from GATT (General Agreement on Tariffs and Trade).
Tax-break programs may also help reduce the tax obligations of homeowners. In fact, some countries may offer tax relief to individuals who rent the property in which they reside and also to individuals earning a certain level of income. The Republic of Ireland, for example, offers such concessions to renters.
In some cases, tax relief may increase national income because it may encourage more work, saving, investment, risk taking, and entrepreneurship. If taxes are excessively or inappropriately levied, then a tax reduction may motivate people to be more productive and create wealth. Moreover, when people earn more income, they are able to spend more and save more.
Tax relief has been widely criticized for being politically popular despite a lack of clear economic benefits from such policies. After all, what is the rationale for granting tax relief that in the long run will be withdrawn? Tax relief is also criticized for having adverse effects on the economy in the long run. In technical terms, the government faces an intertemporal budget constraint, which means that when taxes are cut, other offsetting adjustments are required to make up for the cut. If the government decides to raise taxes later, effectively making the tax cuts temporary, the initial tax relief could lead to lower economic output over time. Tax cuts put money in people’s pockets, but they do not pay for themselves. The government eventually has to pay its bills, and taxes are the primary source of government revenue.
SEE ALSO Earned Income Tax Credit; Tax Credits; Tax Evasion and Tax Avoidance; Tax Incidence; Tax Revolts; Taxes
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