Tax expenditure

Updated: Aug 20, 2021

A means by which the government can encourage particular activities without formally making expenditures. If the government wants taxpayers, for example, to take out private medical insurance, it can either make specific grants for the purpose, which will appear as government expenditure, or it can make an implicit payment by providing a tax allowance which reduces net exactly the same, except for those too poor to pay any income tax. Under the tax expenditure system, however, total government revenue and expenditure are both lower than under the grant system. Tax expenditures allow the government to influence the economic behaviour while reducing the apparent level of government expenditure.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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