Many countries especially those in the third world have had catastrophic consequences owing to the high taxation rates. Some Economics experts have argued that high taxes have not only impeded the chances of building capital, but have also rendered the efforts of building these economies futile.
As a result, many third world countries have been left at the mercy of charity, aid and loans from developed nations. In this article, I will shed some light on how high tax rates affect businesses in these regions.
1) Increased Prices and Product Unavailability.
When a fiscal policy results in increase in taxes on commodities, firms react to this economic shocks by escalating commodity prices in order to cover up for the money used to pay taxes. this increase in product prices will later on bring about inflation.
On the other hand, from the law of supply it is assumed that firms are rational in that they always aim at maximizing profits. In that regard, firms cannot cannot supply some of the products as before especially in cases where the products are of low demand.
2) Shoddy Products.
When high taxes are imposed on products, some funds will be used to pay these taxes at the expense of improving the quality of the products. In some cases, firms may also use shortcuts to flood the market with contraband goods so as to save money that goes to taxes.
3) Low Wages.
It is crystal clear that increase in taxes will impact negatively on the profit margins of firms. In such a scenario workers will feel the pinch since it is they who are involved in creating wealth. Taxes takes away some of the funds that would have been used to pay workers’ wages.
4) Increased Unemployment and Poverty.
As stated earlier, high tax rates reduce the profit margins earned by companies. In extreme cases businesses go bankrupt and some companies are compelled to shut down and relocate to other countries so as to elude high taxes.
In some cases, firms may be forced to lay off some workers in order to maintain their profit margins hence resulting in unemployment. It doesn’t stop there. If these unemployed people do not have other sources of income, they will end up in poverty.
on the other hand, when fiscal policies result in tax increment, consumers will fell the pressure due to increased prices . This implies that consumers may not afford some basic commodities, which they could before hence resulting in decline in welfare, which later on culminates into poverty.
5) Evictions and Homelessness.
Ballooning tax rates also have an impact on rent and mortgage fees. This is because landlords will also increase the rent fees in order for them( landlords) to remain at the same level of utility( satisfaction) and also cater for the increased taxes. Some tenants may not be in a position to afford the new rent rates. As a result,they may face eviction and end up homeless.