What Is A Tax Abatement?The US government introduced tax abatement to increase GDP in the interest of economic development. This leaves us with the question of what is a tax abatement. Further, how is economic development and GDP related with the concept of tax abatement and what is tax abatement used for? The answers to these questions form the scope of this article. Umpteen factors have to be considered in the economic development of a country. Per capita income and GDP are two indicators of the state of a nation's economy. After a certain stage, improvement in GDP is not easy. There are other reasons why economic development of a country stagnates after a certain stage. One significant reason is that infrastructure development of some regions of a country reaches a peak. Very little scope of their further development is possible because of saturation. At the same time, very little infrastructure development takes place in other economically backward regions of the country, because of geography, poor infrastructure, and umpteen other factors. Such lopsided infrastructure development is not conducive for further economic development of a country. Another factor to be considered is that after-tax profit margins of most business enterprises leave little reserves and therefore little scope for business expansion. And if businesses do not expand, no new employment avenues can be generated. With no new employment generation, no business expansion, and non-development of regions with poor infrastructure, no increase in GDP can take place. This has a direct bearing on a country's economic development, which then stagnates. To overcome all these issues in one go, the US government introduced, from 1977 onwards, temporary tax sops (read tax abatement) to certain individuals/organizations for setting up businesses, new real estate projects, building new residential property, and for building new infrastructure in listed economically backward areas of the country. US tax abatement laws provide that these individuals/organizations have to mandatorily reinvest the money so saved through these tax sops into the infrastructure development of economically backward regions of the country. Only then would they be permitted to pay reduced taxes. So, a sort of temporary tax credit or incentive is provided by the US government to such individuals/organizations. This would have a dual effect. Not only would infrastructure development of such economically backward regions proceed, but such individuals/organizations would also benefit due to reinvestment of capital in the expansion of their own businesses. Therefore, tax abatement is a partial or complete exemption from payment of ad valorem taxes of specified personal property or real estate or sales of a business set up in a government listed special economic zone in the interest of its economic development. Such tax exemption, sales tax holiday, or tax credit is provided, generally on a sliding scale, for a temporary period not usually exceeding ten years. Hope this article has provided you a lucid explanation of what is a tax abatement and what it is used for. |