tax expenditure

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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 pay implicitly by giving a tax allowance which reduces net tax paid by an equal amount. The real economic effects of the two systems are 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 economy while reducing the apparent size of the state sector.

Subjects: Economics.

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