What it is:
A tax holiday is a day or period of time during which a government does not tax certain transactions.
How it works (Example):
Sales tax holidays are especially common. Typically, they involve suspending the collection of sales tax on a particular day of the year in order to encourage consumers to buy certain items and help local businesses.
For example, many cities have a tax holiday during the back-to-school season in order to encourage people to shop and to help parents pay less for school supplies.
Tax holidays can take many forms, though. Governments sometimes create tax holidays for new businesses. Developing countries might create tax holidays for foreign companies that relocate to the host country. The overarching idea is to lower the cost of doing business in an effort to encourage economic activity.
Why it Matters:
Although taxing authorities lose out on tax revenue during a tax holiday, many economists believe that tax holidays actually increase tax revenue over the long term because they help businesses stay in business or grow. Over time, this creates more taxable revenue for the taxing authority and even more tax revenue in the form of payroll and other taxes if those businesses retain or hire employees.