ABSTRACT
This chapter addresses the basic issue of defining a tax incentive. It discusses in generic terms the merits of tax incentives as a policy tool. The chapter presents an overview of existing tax incentives in the federal income tax structure. Tax subsidies tend to differ from direct government programs in two ways: they are open-ended entitlements and they do not alter relative prices proportionally for all individuals because of the graduated rates and exclusions of the individual income tax. In organizing the discussion of tax incentives, the following general categories will be considered: work incentives, investment in human capital, savings and investment incentives, and incentives to particular types of consumption. Savings and investment incentives can be further subdivided into two types–general subsidies for certain kinds of savings and subsidies that affect investment. Owner-occupied housing is generally recognized as one of the most tax-favored of particular types of investment.
