Taxation laws hold immense significance in an economy as they create sustainable resources for the government that allow economic growth and development by funding a wide array of public investments. These investments include social programs, infrastructure, healthcare, education and law, and order.
Taxation laws are vital to pave the way for a prosperous, orderly, and well-developed society. Taxation allows the government to raise revenues and ensure an equal division of resources throughout the country. While businesses and the public incur the cost of tax, the whole state gets to enjoy the benefits.
These taxes are essential to fund public goods and services, which is why taxation is a crucial part of the social contract. Tax laws have a quantifiable impact on businesses, both large-scale corporations, and small businesses. They also reveal the legitimacy of a government through their taxation schemes and expenditure. The government is responsible for deciding upon the tax base and the level of tax rates.
It also needs to design a flexible tax compliance system that encourages businesses and citizens to comply with its requirements. However, research reveals that enterprises consider taxes to be substantial constraints in operations management. On the other hand, taxes and tax administration are also indicators of healthy and flourishing economies.
In this article, we will attempt to understand the impact of tax laws and their influence on businesses.
BUSINESSES & TAXES
The amount a business has to pay for taxes has a detrimental impact on its growth and investment. When taxation is high, small businesses and corporations are likely to pull out from the formal sector. Higher tax encourages lesser private investment and fewer legitimate companies. The impact of taxation cannot be stressed enough as it impacts the ability of new businesses to enter an economy.
Higher corporate income tax rates get linked with reduced GDPs and reduced business entry rate. Multinational corporations are also much likelier to invest in countries with lower corporate income rates to increase their profits and reduce costs. This fact creates scores of opportunities for lawyers and legal experts with a background in taxation. Thus, it is advisable to pursue an LLM degree online with a taxation specialization for career advancement and professional growth.
It is essential to understand the various taxes that a business has to pay and their impact on operational costs. Profit taxes and corporate taxes are only part of the total taxation cost a company has to incur. Others include labor taxes, turnover taxes, property taxes, and others. These taxes tend to vary from country to country, depending on the taxation program introduced by a government.
DEVELOPMENT OF THE PRIVATE SECTOR
Reasonable and affordable tax rates have a significant impact on the ease of doing business within a country. It is crucial to maintain moderate taxation levels to allow the development and growth of the private sector. Modest tax rates encourage small and medium-sized enterprises to enter the market. Naturally, this catalyzes employment and economic growth, even though it doesn’t directly contribute to tax revenue.
Research conducted by the World Bank reveals that small and medium-sized enterprises constitute 90% of taxpayers across the Middle East and Africa. However, they only contribute 25-35% of the tax revenue raised by the governments. These numbers indicate that imposing higher tax rates on businesses is not the ideal route to increase government revenues. Higher tax rates encourage businesses to relocate to the informal sectors, or worse, close down operations.
SMALL & MEDIUM-SIZE BUSINESSES
Small and medium-sized businesses have the most to lose from higher tax rates and strict taxation regimes. High taxation can cripple the operations of these small-scale enterprises, and discourage them from entering an economy. The government now has the responsibility to devise reasonable taxation regimes that benefit businesses and the economy.
For instance, the Brazilian government introduced Simples Nacional-a simplified tax regime for small enterprises. This program reduced overall taxation expenses by 8% and increased the registration of new businesses and microenterprises. It allowed an increase in the number of companies registered with the Brazilian tax authority. It also succeeded in boosting tax revenue generation by 7.4% through tax and social security payments. The Simples Nacional program succeeded in increasing employment, profits, and revenues.
Small businesses and medium-scale enterprises can thrive in reasonable and modest taxation regimes. They can benefit from the governmental investments made through tax revenues, such as healthcare and education. In return, these investments pave the way for economic growth by eradicating diseases and illiteracy. However, when the costs of taxation exceed the benefits, it creates a suffocating environment for small-scale enterprises.
Businesses get hugely impacted by the taxes they pay and the services they get in return for taxation. A well-developed economy and a vibrant corporate ecosystem depend on advanced infrastructure and ease of doing business. Tax is crucial to maintain and promote economic growth as it allows all sectors to develop smoothly.
Education and a healthy workforce lays the foundation for productivity and competitiveness, and therefore, contributes to economic growth. Consequently, it is crucial for the government to obtain taxes and contribute to education and healthcare development. However, there is a need to regulate and moderate taxation, so businesses get incentivized to boost governmental revenues.