Difference between Subsidy and Tax

Taxes and subsidies are terms of great importance to individuals, corporations and the government. Both are employed as ways to control and regulate a country’s production patterns and various other economic activities such as trade and agriculture.

The government is provided with a clear stream of revenues in the form of taxes. All individuals and corporations are obligated to put aside certain amount in cash from their revenues for the state governing body, which then uses this money for various purposes – growth, development, expansion, paying off debts etc.

Subsidies on the other hand, are the opposite of taxes and are generally referred to as the payments made by the government to the general public. These payments are a way to encourage individuals to keep on pursuing an activity for the benefit of the whole economy.

Taxes have a negative impact on the buying and selling power of consumers and producers. In economic terms, it shifts the supply curve to the left, thus increasing the price of a good, and decreasing the quantity demand. The overall cost of a good becomes relatively higher for a consumer who then decides to cut spending.

Subsidies however, work the other way round. They can come in various forms such as cash grants, interest free loans, tax breaks, insurance, rebates etc. The main purpose is to provide protection to the local producers. With costs reduced, the producers will be more than willing to produce more quantity, further benefiting the consumer, who will buy more quantity due to the increased financial leverage.

The overall benefits of taxes may be greater than subsidies, depending on the government’s spending streams. When the state has more funds, it can use them to improve the overall infrastructure, pay off national debt and implement various development programs for the needy. Subsidies are usually beneficial to people on a smaller scale, and may curtail government’s own spending power.