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Do tax incentives benefit small business and other private employers?

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yaga49 | (Level 1) Valedictorian

Posted April 28, 2013 at 11:54 AM via web

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Do tax incentives benefit small business and other private employers?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 28, 2013 at 1:54 PM (Answer #1)

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This depends, of course, on the exact nature of the tax incentive.  However, tax incentives do generally benefit private employers.  They do not always benefit all private employers equally, depending on how they are crafted.  However, for those whom they do help, they act, in effect, as a subsidy.

When a government offers a tax incentive, whatever businesses are included under that incentive are essentially being subsidized.  The incentive, in essence, lowers their operating costs.  When their operating costs are reduced, they will be willing and able to produce more of a good or service at a given sale price.  In other words, tax incentives increase supply.

Some tax incentives might hurt some businesses, though.  Often, states and localities give tax incentives to the biggest employers so as to attract them to locate in those jurisdictions.  It is politically (and perhaps economically) more important for them to attract big businesses that will employ a large number of people than it is to lower taxes on small businesses.  Therefore, tax incentives can often reduce costs for big businesses without helping the smaller ones.

Finally, it is possible that a badly made tax incentive could hurt a business that it does apply to.  If there are tax incentives for certain activities, firms will be likely to try to pursue those activities even if that is not in their best interest (because, for instance, there is no good market for a certain product they are being encouraged to make).  Economists say that such incentives “distort” markets and make firms pursue activities that do not end up helping them in the long run.

Thus, tax incentives do help business, but they do not always do so.

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