Taxes and subsidies are terms that are very commonly used in economics that have a large impact on the country’s economy, trade, production, and growth. Taxes and subsidies are complete opposites of one another; taxes are a cost and a subsidy in an inflow. Taxes are levied to discourage certain activities, to grow local domestic industries, and also one of the major forms of government income. Subsidies are given to encourage certain activities, improve growth and reduce cost levels. The following article explores both these terms in greater detail and offers a clear explanation of their similarities and differences.
Tax
Taxes are financial levies imposed on an individual or corporation by the government. Taxes are not paid voluntarily and are not considered to be ‘donations’ to the government; rather a tax is a compulsory contribution imposed on the individual/corporation. Failing to pay taxes can result in the taking of legislative action.
Taxes exist in our everyday lives even though they are called by different names such as toll, duty, excise, custom, etc. The best way to identify payments that are taxes is to understand which of the day to day payments we make are imposed by the country’s government. Taxes are levied by governments for a number of purposes such as, spending on a country’s infrastructure, nation’s security, development, funding public services, law enforcement, pay for public utilities, pay off debt and the general running of a country’s government, among others. There are a number of different taxes such as income tax, capital gains tax, corporate tax, inheritance tax, property tax, VAT, sales tax, etc.
Subsidy
Subsidies are benefits that the government will provide to corporations and individuals and can be in the form of a cash inflow, or a tax reduction. A subsidy is given to reduce the burden on the individual or the corporation, and subsidies are generally considered to be beneficial to corporations and individuals as it reduces costs and improves business profitability. There are a number of different types of subsidies such as grants and direct payments, tax holidays/concessions, in-kind subsidies, cross subsidies, credit subsidies, derivative subsides, government subsidies, etc.
Subsidies are also treated as a trade barrier since it results in lower costs of production thereby making locally produced goods more competitive than imports. Subsidies can, however, result in market inefficiencies and can result in economic costs as a subsidy can artificially and unfairly change the playing field in a free market place.
Subsidy vs Tax
Subsidies and taxes are complete opposites to one another. The only similarity between the two is that the government is responsible for imposing taxes and providing subsidies. A tax is seen negatively as a cost to individuals and corporations as it increases levels of cost. Subsidies, on the other hand, are considered to be positive as it improves competitiveness and reduces the cost for local producers, and can encourage more investment and higher levels of production. Taxes, however, are for the greater good of the country as it is spent on the country’s development, etc.
Summary:
Difference Between Subsidy and Tax
• Taxes and subsidies are terms that are very commonly used in economics that have a large impact on the country’s economy, trade, production and growth.
• Taxes are financial levies imposed on an individual or corporation by the government.
• Subsidies are benefits that the government will provide to corporations and individuals and can be in the form of a cash inflow, or a tax reduction.
• Taxes and subsidies are complete opposites of one another; taxes are a cost and a subsidy in an inflow.