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What is a Tax Advantage?

Solomon Branch
Solomon Branch

A tax advantage is a term that refers to the receiving of a monetary bonus in the form of a reduction, removal, or deferment of a tax. It is often seen in relation to certain types of accounts, investments, or other incentives, such as charitable donations. Tax advantages are usually dictated by a government in the form of a statute within the tax laws.

The main reason for having a tax advantage is to stimulate growth and reinvestment in the economy. Tax advantages can come in many forms, but the most common is probably the tax-free advantage, which means no taxes are charged for a certain activity or account. One example of this is the 529 college account in the United States (US). Money that is put into the account is not taxable as long as it is used to pay for certain college expenses, such as books and tuition.

Money in private retirement accounts is often not taxed.
Money in private retirement accounts is often not taxed.

A prime example of a tax advantage can be found in certain countries, usually smaller ones, which offer businesses or residents very limited or no taxes. Many businesses set up shop in these areas so they can avoid paying taxes in their own country. These areas are known as tax havens. The rules and regulations vary quite a bit, and not all countries or municipalities offer the same tax advantages.

One problem that can arise in a government offering a tax advantage is the loss of economic balance that can occur. In the case of countries that offer benefits to their elder population, if the population of that part of the country increases it can lead to a deficit if the benefits are paid from the current incoming taxes, which may not be enough. One answer to that problem, which several countries have employed, is to offer a tax-free private retirement account.

In private retirement accounts, the money that will be used is often not taxed. This takes the burden away from the government, whose form of payment is from taxes. Older citizens receive a tax break and the system isn’t overwhelmed, assuming enough citizens contribute to their own retirement funds.

Overall, the tax advantage is a way to keep an economic balance. By offering incentives for activities that give back to the overall economy, this balance is kept. Problems only arise when the amount put back in is not the same as the amount taken out or not received due to tax advantages. Other than a poorly managed system, issues such as tax evasion, the illegal avoidance of paying taxes, can also contribute to a lack of economic balance.

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    • Money in private retirement accounts is often not taxed.
      By: Christopher Meder
      Money in private retirement accounts is often not taxed.