What do tax deductions and credits aim to achieve?

Tax deductions and credits are primarily designed to encourage specific behaviors in taxpayers. Governments often utilize these financial incentives to promote activities deemed beneficial for the economy or society, such as investments in education, homeownership, energy efficiency, or charitable contributions. By offering deductions or credits, the government can guide taxpayer decisions in ways that align with broader public policy goals.

For instance, a tax credit for electric vehicle purchases promotes environmental benefits while a deduction for mortgage interest incentivizes homebuying, which can stimulate the housing market. This careful structuring of tax incentives helps shape economic activity and outcomes that the government desires.

While tax deductions and credits can indirectly affect government revenue, their primary purpose is not to increase revenue but rather to modify taxpayer behavior in a targeted manner. Limiting personal income taxes can be a beneficial side effect of these incentives but is not the main aim. Similarly, standardizing tax laws across states is more a matter of legislative consistency rather than the direct purpose of tax incentives, which are inherently tailored to support specific behaviors.