What is Tax expenditure?

Economy and Finance

27 Aug 2023 Zinkpot 149

Tax expenditure refers to the expense of the government in providing taxpayers with exemptions, deductions, rebates, credits for deferring taxes, and so on, or the opportunity cost of taxing at lower rates.
It basically means the amount of additional money the government could have received if such policies had not been implemented. It is often termed as revenue foregone.
When the tax burden increases to such an extent that it impacts the survival of a sector, relaxations are given for the sector to flourish which is known as tax expenditure.
They are undertaken to decrease the impact of oppressive taxes that result in revenue losses. They promote social goals without incurring any direct expenditures.
Tax expenditure can be of various types such as tax provisions that reduce the present value of taxable income through deferring allowances, special exclusions, exemptions, etc.
Tax expenditures function as subsidies for certain activities and alter the equity of the basic tax system by giving preferential treatment to some activities.
For instance, two people who have the same income can have different effective tax rates. If one of the taxpayers qualifies for certain tax expenditures by owning a home, having children, or receiving employer-provided health care and pension insurance.