DEFINITION of 'Tax Holiday'

A tax holiday is a government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment.


When a government body wants to encourage the purchase of certain items or bolster participation in certain activities, it may issue a tax holiday, a temporary period during which the tax rate applied to certain products or services is reduced or removed. For instance, many local governments have a sales tax holiday the weekend before school resumes in the fall to reduce the cost burden that parents carry when shopping for their children’s school supplies or clothing. Sales tax holidays, like the back-to-school one described, are a common type of tax holiday administered by state governments.

A tax holiday is also implemented for businesses to encourage economic activity and foster growth. Used in the hopes of increasing the gross domestic product (GDP) in developing countries, tax holidays are a way in which governments attract foreign investors or foreign companies that establish base in the host country. Tax holidays are often put in place in particular industries to help promote growth, develop, or diversify domestic industries. In some cases, new businesses are given tax holidays which helps the business reduce some of its costs of operation, while it focuses on increasing revenue and growing. This fiscal policy measure may also serve as an incentive for more people to start businesses.

Whether there is any benefit to tax holidays is still a debate. On the one hand, even though the government loses out on revenues that would have been generated from sales during the temporary tax-break periods, tax holidays are said to increase tax revenue over the long term because they help businesses stay in business or grow, creating more taxable revenue for the tax authority. In addition, the lost revenue is also said to be offset by the increased purchases of consumers looking to take advantage of the tax break.

On the other hand, it is believed that the increased sales during a tax holiday is preceded by reduced sales before the holiday; thus, the tax holiday simply shifted sales that would have happened before or after the holiday to the holiday dates. In effect, consumer don’t buy more, they simply shift the timing of purchases. Also, since retailers do not pay sales tax out-of-pocket (the consumer is responsible for sales tax), some retailers may unethically take advantage of tax holidays by increasing the prices of the goods and reducing consumer savings.

  1. Bank Holiday

    A bank holiday is a business day, during which commercial banks ...
  2. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  3. Modified Following

    Modified following is a facet of date rolling that occurs when ...
  4. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  5. IRS Publication 509: Tax Calendars

    IRS Publication 509: Tax Calendars is an IRS document that provides ...
  6. Local Tax

    A local tax is tax assessed and levied by a local authority such ...
Related Articles
  1. Personal Finance

    Average Cost Of An American Christmas

    Here's a look at how much the average American family is expected to spend this holiday season.
  2. Insights

    What to Own if Congress Passes a Tax Holiday Next Year (MSFT, GE)

    According to Goldman Sachs, economists have assigned a 50% probability that a corporate tax reform will be implemented during 2017, given a Clinton win in November and a divided Congress.
  3. Investing

    The Handy Guide To Global Stock Market Holidays

    Exchanges close on holidays--which vary by country. If you're a global trader, it's useful to have this handy Investopedia bank holiday reference.
  4. Tech

    First Data: 2016 Consumer Holiday Spending Up

    The tech firm's latest Holiday 2016 SpendTrend report indicates 4.7% YOY increase.
  5. Personal Finance

    8 Tips to Help You Control Holiday Spending

    These tips will have you singing "Joy to the World" well into the New Year.
  6. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Personal Finance

    How To Minimize Holiday Debt Before It Happens

    Holiday expenses can drown you in debt. Find out how to avoid this festive spending hangover.
  8. Taxes

    10 States With High Sales Taxes

    Most states have sales taxes of some kind for goods and services. Here's a rundown of the states that have the highest sales taxes.
  9. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  10. Investing

    Amazon Could Have a Record-Breaking Holiday Season

    Nearly half of all online shoppers will buy products on this holiday season, according to SunTrust Robinson Humphrey.
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center