What is the primary purpose of tax credits?

Tax credits serve as a mechanism to provide a direct reduction in the amount of tax a taxpayer owes to the government. When a taxpayer qualifies for a tax credit, it effectively decreases their tax liability on a dollar-for-dollar basis. This is substantial because it means that taxpayers can reduce their financial obligation directly, unlike deductions, which only reduce taxable income.

For example, if a taxpayer has a tax bill of $1,000 and receives a tax credit of $200, their new tax obligation would be $800. This functionality makes tax credits an important tool for tax policy, often designed to incentivize behavior that aligns with governmental objectives, such as education, healthcare, or renewable energy investments.

The other options, while they may contribute to broader fiscal or social goals, do not accurately capture the fundamental purpose of tax credits. Encouraging savings or promoting investment involves indirect benefits and mechanisms, while increasing complexity runs counter to the aim of tax credits, which is to simplify the reduction of tax liabilities for qualifying taxpayers.