I understand that subsidies are from the government to fund things that they want to promote, but where exactly do they get the money from? Is it from tax income?
In: Economics
Where the money comes from depends on how the subsidy is setup in law. It may come from taxes, fees, tariffs, borrowing, or revenue from government enterprises (like state Lottos).
Governments get their money from two general sources:
1. Taxes (which can be income, fee, sales, or asset taxes).
2. Borrowing which will have to be repaid with future tax money. The goal is often to repay with tax money on the economic activity generated from current subsidized project.
From taxing US citizens or borrowing from private banks like Chase or Bank of America. Except that bank is called the “Federal Reserve”. Make no mistake, it has nothing to do with the government. It has as much to do with the government as Mastercard does.
Essentially, yes. Public finance is potentially very complicated, especially by the fact that governments manage large debt loads and also control the currency they’re spending. However, none of these complications can get them around the fact that a dollar spent on something (like a subsidy) carries a cost, and all those costs eventually come back to the public – either through taxation or inflation.
That said, subsidies CAN be a net positive in terms of tax revenue. By supporting some new economic activity now, the subsidy can lead to a large, taxable industry in the future. Refusing to subsidize anything ever could be like eating the seed corn. Everyone proposing a subsidy will make this argument, though only some of them will be correct.
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