Tax Policy as One of the Chief Factors in the Legal Environment of a Business - Essay Example

Impact of Taxation on International and Domestic Business Introduction Tax policy is one of the chief factors in the legalenvironment of a business. Taxes may impact the business either positively or negatively depending on the type of business and the form of tax in question. Some of the factors that are determined by the taxes payable by business include prices of products and services, employment, investments, location, business structures and decisions, and growth as well as expansion of the business. Taxes vary across countries and locations depending on policy makers and the government involved. For instance, the UK and Japan have embraced the regional tax systems whereas US the international tax ("A Tax Policy Update for America’s Small Businesses"). The tax systems determine the competitiveness of any given business with similar businesses all over the world. There are numerous taxes that impact the business either directly or indirectly. These include income taxes, employment taxes (National insurance), corporation tax, capital gains tax, value added tax (VAT) (sales tax), excise duty, import duties, specialist taxes, and property taxes as well as business rates (Simister). The politicians all over the world have colluded to tinker the tax policies. This implies that as globalization is taking place and businesses expanding, the tax policies get complicated and there are more loopholes that impacts businesses both directly and indirectly. This paper discusses the taxes and the impacts they have accustomed on businesses either at local or global levels. How Taxes Impact Business The first impact of tax is on the profits of the business. At the federal level gains and profits are taxed. This affects the business’ overall profit since part of the profits is submitted to the government in the form of taxes. The businesses cannot expand because the businesses cannot expand or employ more people so as to improve on their outputs. For example, if a company makes a profit of one hundred thousand dollars and the tax rate is thirty percent then it means that three thousand dollars will go to the government as tax (Djankov, Ganser, McLiesh, Ramalho, and Shleifer 246). This cost, therefore, will be transferred to the product and services prices for the company to meet its objectives; as a result the business might fail to perform well due to reduced consumers demand. If tax rates are unfavorable in a given area or country, most businesses may fail to invest in the location thus reducing their abilities to expand (Yoshov and Brumbaugh 40) Secondly, tax rates affect the structure of a given business. A business structure is an organizational framework that is legally recognized within a particular jurisdiction for conducting commercial activities. Examples of business structures include sole-proprietorships, corporations, partnerships, and limited liability companies. Tax rates in a particular jurisdiction or region greatly determines the structure of ownership of the business as it is being created or established. For example, creating a Corporation will be the best structure to work with because the tax entity s completely separate from the owner. Consequently, creating the company is lengthy and time consuming and this cuts out the small business owners. On the other hand sole proprietorship will cost nothing to open. However, all business profits go to the owner because the government does the taxing indirectly (Simister par.3). The third way taxes affects the business is by determining the location of the business itself. The tax rates of different countries vary. As a result some may be favorable while others harsh depending on the type of business it is. For instance, the variation of tax rates on the sale of goods as well as property taxes at state, international and local levels may impact how the owner chooses the location of a business. If the tax rates are harsh or unfavorable for the growth and expansion of the business the business may decline to move to the location. This will have effect on the job opportunities being created by the business as well as loss of jobs. The latter is possible if the business was operating in areas that had favorable tax rates but have been changed by the government policy (Yoshov and Brumbaugh 40). Some corporations are subjected both to local income taxes in addition to the corporate income taxes by the federal government. When the burden gets too heavy for them to bear the businesses is forced to relocate. The process of relocating is usually expensive and time consuming. The market in the area of relocation will also take long to cover so the company might make huge losses. This also comes with the loss of jobs as well as the revenue to the government’s economy and the cycle of problems beginning form consumer to business owners begin (Simister par. 3). A country that is insecure does not provide favorable environment for investments opportunities by businesses The last way in which tax affects business is through determining employment decisions. The cost of hiring employees may affect the business’ performance since manpower is the driving force behind every business. If the business is small then the sole proprietor might run it but on the contrary a company will be forced to adhere to the tax rates and hire thus reducing its profit margins. For instance, corporate income tax influences how the company hires. This will be determined by the rate of the tax. If it is too high then only few individuals are hired this creates little job opportunities. This is because the corporate taxes eat away a huge chunk of the company’s income. The corporations in this way are faced with the challenge of growth as well as expansion. There have been instances where corporations decide to lay off workers in order to realize their profit margins and maintain income (Simister par. 3). As taxes increase the rate of unemployment also increases this leads to the increase in the level of insecurity across borders or even the country itself. Taxes may also affect the functionality of a business in terms of products. Simister further notes that when taxes are raised on a given product and the company cannot do away with it, it may decide to manufacture new product. Usually the cost of purchasing new technologies that would ensure this is very high being that they are also taxed. The business might therefore collapse due to lack of proper business environment (par.4). Tax regulations that differ from country to country affects direct foreign investments to the country and most multinational companies might shy away from such areas. This in turn may affect the thriving of the small companies that are usually dependent on the products and services from such multinationals. A good case is the UK and Japan who have the regional tax system compared to US which has the worldwide tax system ("A Tax Policy Update for Americas’ Small Businesses"). The differences in taxes may hinder the competition power of businesses that are in areas with unfavorable tax rates. This is because much of the profits that are being made by these businesses will go to the government in form of taxes. This also affects the investment by multinationals in a given country. Multinationals will only invest in areas where there are favorable tax systems that have better tax rates and additional tax incentives. On the contrary the multinationals will avoid the areas where the tax rates are high (Yoshov and Brumbaugh 41). Examples of Taxes and their Impact on Business Income tax can be looked at form different dimensions. This includes the customers and entrepreneurs, employees as well as managers who are important components of a business. Employees pay healthcare and pension taxes, social security as well as national insurance. These employees are consumers for products that are offered in the market by businesses. If there is a reduction in income taxes then businesses are likely to flourish because most employees spend what they earn. This directly impacts the demand which will rise as a result. For instance, the consumers will be able to buy more and trade up in quality. They will shift their demands and choose to fulfill them through high priced and quality goods. On the other hand upsurge of tax will reduce the consumer’s expenditure power ("A Tax Policy Update for America’s Small Businesses"). The entrepreneurs too are likely to change their behaviors and make decisions that are not risk prone. This may even lead to closure of businesses. National insurance affects business in the way that the employers are forced to pay a proportion of the employee’s gross salary to the government. This has made most employers opt to do the run the business themselves. Some of these employers lack the expertise to run business and thus it ends up collapsing. On the other hand corporation tax levied on taxable business profit also affects the businesses. For instance, shareholders who get their dividends from the profits of the business often suffer when the tax rates are so higher. This as a result reduces the returns that are likely to be achieved on equity investment making it tougher for small investments as well as small enterprises to raise finance (Yoshov and Brumbaugh 42). When selling assets the business is forced to pay capital gains. As the business does this the business itself may be sold raising problems in capital gains. Increase in capital gain tax rates usually cuts back into the reliefs set in place for the entrepreneurs thus affecting the future growth of the business. The incentives provided to the entrepreneurs are then impacted by the impact of instant cash ("A Tax Policy Update for America’s Small Businesses"). The increase of VAT rates impacts the administrative power of businesses. As the rate changes the businesses are force to label the goods in the market so as to take care of the price changes relative to the taxes. The increase in price may further affect the purchasing power of the consumers since those who operate on fixed budget would reduce their consumption patterns to cater for the changes in prices. When items such as fuel, cigarettes, and alcohol among others is raised maybe by the government policies that try to reduce the rate of consumption for the good of the environmental or health issues excise duty is raised making it expensive for customers to purchase and this causes the shift in their demand. This directly affects the businesses because they are forced to cope with slow returns and maybe losses at times (Yoshov and Brumbaugh 39). Impact of taxes to Businesses in U.S .In order to understand the impact of higher taxes on the income of a given business, it is wise to look and analyze the exponential growth of taxpayers who report their income to the government in the past three decades in the US. These include sole proprietors, C and S corporations, partnerships and limited liability companies. The number of these non-corporate firm types has increased tremendously. They are referred to as pass through entities because the profits that accrue from them are going directly to the owners and taxed on them individually as well. On the other hand the traditional C corporations have the taxes distributed to the shareholders, who once again are taxed at individual levels. This means that the shareholders are taxed twice. Figure one shows the exponential rise of the number of non-corporate businesses and a decline in traditional C corporations in the United States from the year 1980 through 2010. (Pomerleau) As evident from the table, between 1980 and 2010 the number of pass- through businesses rose in a triple format from about ten million to thirty million. The number of sole proprietors grew from nine million to twenty two million. The number of S corporations and partnerships also grew from two million to seven million (Pomerleau). From the data above it is therefore evident that the taxes on a given form of a business directly affect the choice of owners to invest into the business. It is therefore important that policy makers research effectively before making adjustments to the tax policies so that the businesses which are source of revenue to the government can increase. The decline of C corporations was steady from 2.4 million to 1.5 million. A denoted here the new tax laws on corporations changed in 1980 resulting to the decline in the popularity of such businesses (Pomerleau). The net income of the corresponding businesses is also presented in the figure 2 below. As can be shown from figure 2, the income from the pass-through businesses increased five times while that of C corporations only doubled. The number of pass-through businesses grew in number generating more income than the C corporations (Pomerleau). Another factor worth noting is that there is stability in income for the non-corporate businesses compared to the volatility of the C corporations. It can be seen from the data above that it is the tax policies that affect a given type of business. For instance, as Pomerleau argues, most people would go for businesses that are least taxed so as to realize their objectives. Countries should therefore consider having in place new policies that would favor businesses. This will open up chanced for investments in the countries as well as cross border. If taxes are raised on businesses then it would reduce their efficiency in creating employment. This will affect the whole cycle of business because most if not all employees are the consumers of products and services from the businesses (Djankov, Ganser, McLiesh, Ramalho, and Shleifer 281). Conclusion Taxes affect businesses either directly or indirectly as shown in the paper. Worth to note is that the tax laws can transverse across borders or be present in the local business environment. Governments through politicians affect how the tax rates are either increased or reduced. Most of the tax laws however, have a great impact on the environment the businesses operate. As a result of the taxes some businesses have been forced to close while some of them have lacked the opportunity to expand. Governments should therefore analyze the best tax policies that are favorable to the businesses. At a glance the impacts borne on a business by tax rates are many. For instance, income and national insurance tax will affect the income of households through lowering the consumers demand as well as reduce the number of incentives open to employees. Corporation tax has its effects in reducing the gains accrued to retain and invest or reinvest in the business. On the other hand its reduction positively impacts the business because the businesses will be able to invest, expand, and create more job opportunities (Djankov, Ganser, McLiesh, Ramalho, and Shleifer 281). VAT that is taxed on household goods will directly influence the supply and demand chain in that the prices of commodities will increase proportionally with its increase thus inflation. This reduces the profits of the businesses indirectly. When capital gain tax increases the business’ ability to invest financially is reduced. All these factors stated affect business either directly or indirectly. The taxes define the operation margins of the businesses therefore when making such policies it is prudent not to overstep the objectives behind every business; to make profits. Works Cited "A Tax Policy Update for Americass Small Businesses." The U.S. Small Business Administration | SBA.gov. SBA, n.d. Web. 8 Nov. 2014. . Djankov, Simeon, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer. "The Effect of Corporate Taxes on Investment and Entrepreneurship." American Economic Journal: Macroeconomics (2010): 245-283. Print. Pomerleau, K. "Individual Tax Rates Impact Business Activity Due to High Number of Pass-Throughs | Tax Foundation." N.p., 3 Sept. 2013. Web. . Simister, P. "Impact Of Tax On Business." N.p., 4 Oct. 2011. Web. . Yoshov, Brian L, and David Brumbaugh. Taxation and Tax Policy Issues. New York: Nova Science Publishers, 2007. Print.   Read More