How Tax Rates Can Affect Business Activities

Tax rates charged on individuals and businesses is a debate that takes different faces. There are moral, economic and social justice issues arise when discussing the taxation topic. Furthermore, taxation policies have been used by governments across the world as a means to influence the direction of social progression in their countries. Other countries like the Cayman Islands have used low taxes to increase economic growth.

For instance, governments looking to discourage certain economic activities can use taxation policies which are particularly effective in making the activity unattractive. The opposite is also true, where taxation policies can be used to encourage the certain business sectors.

In all, taxation policies and the rates payable have a huge influence on the business environment. Tax rates are double-edged swords; thus they can yield positive or negative influences on businesses. Herein, we will look at some of the ways tax rates affect business.

The Profits Accrued By Share Holders

Dividends payable to shareholders is calculated after a business has met its tax responsibilities. In this regard, the payable dividends that end up in the pockets of the shareholder are influenced by the amount of tax that a business has to pay.

With this in mind, you should note, with other factors notwithstanding, high tax rates on business invariably results in a low return on equity. The opposite is true, where low tax rates on businesses result in high returns on equity. Therefore, the prevailing tax rates have a direct influence on the profits enjoyed by shareholders.

The Expenditure

As mentioned, tax rates have an influence on the year-end net profits that businesses register in their books are the company’s funds. With this in mind, taxes also influence the size of the company’s coffers which influences the company’s spending power.

Therefore, on one hand, low tax rates can positively affect businesses by resulting in increased operating funds, resulting in lower purchasing power. On the other hand, high tax rates can reduce the amount of money that the business has in its coffers, thus reducing its operating funds, causing a reduction in expenditure.

The Corporate Structures

In recent, taxes rates have influenced how businesses structure their businesses. Many businesses develop their corporate and tax structures with the aim of reducing the amount of taxes that they pay. In this regards, it is common for businesses, especially those that pay huge tax rates, to operate off-shore accounts or incorporate in tax haven countries, with the intention of reducing their tax burdens.

Business Expansion On A Global Scale

Doing business is now a global affair. For instance, it is possible to have a supplier from one end of the globe (China) and the market at the other end (U.S.A). With this in mind, more and more businesses are spreading their tentacles, by spreading their global footprint.

However, the prevailing tax environment in different states and countries also influences the decision to set up shop in new markets. If the tax environment is prohibitive, businesses will shy away from setting up shop in such countries. The opposite is also true, where enabling tax environments, tend to attract more businesses. In this case, one can regard taxes as an influencing factor in the ability of businesses to expand and attain a global footprint

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