Most processes or systems have their upsides and downsides.
But, in a situation where the disadvantages of a process completely overshadows the advantages,shouldn’t it be reevaluated?
In this article, the effects of taxation on businesses and how to tackle it will be discussed but this cannot be effectively done without a brief explanation of taxation, it’s purpose and it’s principles first.
Taxation And It’s Principles
Investopedia defines taxation as all types of involuntary levies from income, to capital gains to estate taxes.
Mainly, taxes are levied to raise money for government expenditures at all levels.
Thay is, every project that the government embarks on is paid for by the taxes of the masses.
Another reason for levying of taxes is for the redistribution of wealth from rich to poor so that the poor can survive.
At the wealth of nations in 1776, Adam Smith argued that taxation should follow four principles; fairness, certainty, convenience and efficiency.
Certainty: There should be no underlying fees and tax payers should be completely and clearly informed about how taxes are levied, why they have to pay taxes and how much they have to pay as tax.
Fairness: It involves the tax levied being compatible with tax payers conditions including their ability to pay in line with their personal and family needs.
Convenience: This involves making the process of collecting and paying taxes relatively easy and simple. That is, every unnecessary paperwork and steps should be eliminated.
Efficiency : Resources use and allocation should not be more than the tax generated.
No matter how big the government expenditure is, it should easily be within the confines of the generated tax.
Unfortunately, there is no restraint on the uncontrolled levying of taxes and fees and this is just one of it’s problems.
Other problems include the fact that tax systems lack transparency, the system refuses to prosecute those that evade taxes and tax payers are burdened with administrative tasks when the process of tax paying should be relatively easy and stress free.
These problems are bound to have negative effects on businesses and they are:
1) Minimal Wages
On the ledgers of businesses, taxes are usually the highest budget items.
This high amount of taxes paid reduces the amount that would have been paid as wages for staff.
For most people, the wages they receive are their only source of income and sometimes the only source of income for their families.
It is already hard enough for families to survive on one source of income, now you can imagine how hard it is to have their income reduced all in the name of taxes.
This impedes the growth of businesses.
2) Minimal Income
After paying taxes, wages of staff and spending money on other minor or major expenses, there is usually not enough money as profit or income for business owners.
It might not seem likely but this is what is happening in most businesses (especially those on a small scale) in the world.
It is disheartening to see that business owners who invest so much in their business, get little profit in return.
This is also discouraging for the business owners as they would most likely see their business venture as a wasted and futile effort.
3) Discontinuation Of Businesses
With business owners thinking of their businesses as a wasted effort, they might eventually give up on the business and watch the business be reduced to nothing.
This is a little bit justified because nobody would want to keep working on a lost cause.
Even at times, business owners decide to persevere and continue working on their business, they can’t produce as much as they used to.
This eventually leads to unavailability of products and services and the businesses are forced in one way or the other to shut down as their net income isn’t enough to keep these businesses running.
4) High Prices
Taxation affects the prices of goods and services in two different ways.
On one hand, prices of goods and services may increase because businesses have to raise money to pay their taxes and they wouldn’t want to take it out of their workers wages or income.
On the other hand, when businesses close down, the total number of businesses producing a particular good or offering a particular service reduces.
There are fewer goods with more consumers.
These remaining businesses may take advantage of this and exploit people by raising the prices of their goods and service.
This is called inflation.
Either way, the increase in the price of goods and services can only spell doom for businesses and the economy as people are less inclined to buy such goods and would rather seek out cheaper options.
5) Reduction In Quality Of Goods And Services
This is almost inevitable as the money used to improve the quality of products have been converted to tax.
For this reason, businesses are forced to cut corners to produce products so that they can pay their outrageous taxes that have been levied.
This reduction in quality is seen in most products produced and services rendered nowadays.
Take a brand of toothpaste for example, let’s call it Toothaid.
At first, Toothaid comes out, people are impressed and start buying it often.
Then the uncontrollable and outrageous levying of taxes begin making the Toothaid brand unable to continue with the quality and consistency they initially started with.
With the continuous increase in the taxes they are supposed to pay, they are forced to spend less on packaging, quality and quantity leading to the product looking shabby with progressively less quantity and quality than it originally started with.
6) Lost Jobs
It may seem far fetched but paying too high of a tax can actually herd a business into bankruptcy.
Bankruptcy sets off a chain of events which includes reducing staff wages, laying off staff and the eventual closure of businesses.
More likely than not, the demands of businesses make it hard for their staff to have side jobs or hustles giving them nothing to fall back on when they lose their primary and only source of income.
Families and business owners are now forced to revert to working menial jobs and start living from hand to mouth.
Ultimately, the loss of jobs and bankruptcy leads to poverty.
People who were barely able to eat three square meals on their meagre wages and income might now be completely incapable of getting a meal a day.
Living in poverty makes people easily susceptible to diseases and illnesses as they are now unable to afford basic amenities.
With more and more people living poverty induced lifestyles, businesses will suffer, especially luxury goods businesses as people would be more concerned about feeding themselves than buying the latest watch in town.
8) Increased Rate Of Crime
When individuals have adapted to living comfortably and luxuriously, it is somewhat difficult to now adapt to living poorly when things go sour.
For this reason, people may seek to continue living their lavish lifestyles by going into a life of crime which involves armed robbery, buglary and kidnapping for money.
Though there is no justification for such heinous acts, it’s safe to say that most of them were pushed into it by poverty and their inability to make ends meet.
Businesses are sometimes the victims of these crimes because they are usually the target of some crime rings who are looking to cart away large sums of money from their every operation.
In a way, virtually everybody suffers from this because businesses would be unable to pay their tax if their money have been stolen, this means a reduction in the generated tax whic also implies that the government cannot effectively redistribute wealth.
Some other effects include:
1) Taxation reduces the rate at which people go into entrepreneurship as they are scared off by the exorbitant amount they have to pay as tax even when their business haven’t taken off.
2) With businesses managing their barely there income after paying their tax, saving doesn’t stay a priority anymore because they will be more concerned with keeping the business open and surviving.
3) With high taxation forcing more businesses to shut down, foreign investors are deterred from investing and domestic investors are driven out as there are less businesses to invest in.
With less and less people seeing the potential in a business plan and investing in it, businesses are sure to perish as there is no capital to keep them going.
Tackling The Issue
Luckily, most problems have a solution and the issues that arise as a result of taxation aren’t exempted from this.
It would be so easy to get rid of this problem of taxation by stopping every form of collecting money but unfortunately, things do not work that way as the government still needs a way to generate revenue for it’s expenditures and redistribution of wealth.
Instead, tax rates should be reduced as it encourages businesses to produce more, encourages savings and also draws in both domestic and foreign investors.
The government can also help by rechecking their budget and getting rid of all unnecessary expenditures so that the taxes demanded of businesses wouldn’t be too much.
Other checks should also be put in place to make sure that bigger businesses pay more tax than the smaller ones and not the other way around.
In conclusion, taxation has it’s upsides but it’s downsides outweighs all upsides.
Therefore, it must be reevaluated to ensure that everybody (the government and businesses) benefit from it.
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