Tax Subsidies

A large number of countries are using tax subsidies as a form of state influence on the economy. Although the amount of subsidies in an economy is difficult to accurately measure, it does appear that they relate to several percent of gross domestic product. Thus, in the European Union explicit subsidies are on average three percent of gross domestic product and about 10 percent of total budgetary expenditures.

The range of economic policy that results in formation of state subsidies is very wide, and therefore they can have a  different meaning and a different scope for different individuals. In the broadest sense, subsidies can be defined as state aid to producers or consumers for which the state does not receive any revenue-but it is conditioned by a special kind of activity or behavior of the recipient. A producer who has received a subsidy lowers their production costs, while consumers who receive a subsidy from the state increases its disposable income.

Tax subsidies can be explicit (if they represent an immediate cash outlay), or implicit, (if the immediate cash outlay is not present). Direct cash transfer from the state budget to a branch of an individual makes a direct and explicit subsidies. But, for example, lower interest rates on loans that are provided, whose branches are developing plans to raise an implicit, are indirect and hidden subsidies. In various countries both forms are widely used, therefore it is worthwhile to study the grants including not only direct subsidies as part of the current expenditure budget, but also its hidden forms.

The main purpose of subsidies is to amend their application in economic activity that it becomes preferable to the situation that exists without the use of subsidies. Most often the goals of the application of state subsidies to higher employment rates and faster economic growth, efficient use of rare resources in the presence of market failures, balancing the deficit or a more equitable distribution of income, income that it distributes on behalf of families with lower incomes.

Producer subsidies are explicitly or implicitly paying companies or entire sectors, to encourage their development. Producer subsidies operate so that the productive resources (labor and capital) are moving in the subsidized sectors, to the detriment of the sector who doesn’t receive subsidies. This movement of resources has consequences for overall economic efficiency. The main task of the market is to allocate production resources to enhance their productivity. When the state provides subsidies to those changing market signals and artificially raised the profitability of selected economic activities.

Reasons for the use of tax subsidies are generally classified into two categories: correcting market failures and redistribution of income. While the correction of market failures is related to the principles of economic efficiency, income redistribution is related to the principle of fairness.