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What Is a Tax Holiday?

A tax holiday is the suspension or elimination of taxes for a temporary period. A tax holiday is implemented by governments on various types of taxes for specific reasons. A tax holiday may involve either reduction of taxes or the total elimination of taxes.

Most often tax holidays involve the suspension of sales tax. In some cases, however, other kinds of taxes are subject to holidays as well. Some examples include corporate taxes and payroll taxes. In the latter examples, the goal is to give businesses a break and to attract more investments. For sales tax holidays, the economy still benefits as products become more affordable, giving consumers a break and giving them more purchasing power.

In the United States, 13 states hold a tax holiday weekend sometime in August. This tax holiday involves items that are essential for school. As such, clothes, school supplies, computer equipment, and the like are sold without taxes during the tax holiday. There might be restrictions - such as items over $100 being subject to tax - but in general, the tax holiday enables consumers to purchase more with their money.

Foreign investments are important to many economies. Attracting foreign investors is paramount to some governments’ strategies. Usually, tax holidays are part of these strategies. Granting tax-free periods to foreign investors usually makes the deal sweeter.

In times of high unemployment rates, tax holidays on payroll can be applied. This is a tactic that can encourage hiring more people. This is but a temporary measure, though, and will not last long if the overall economic conditions do not improve.

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