Page 306 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

may not exist. A slow growth rate will increase unemployment levels as there will
be fewer jobs. In this situation, governments may change their economic (fi scal)
policies to encourage growth.

Fiscal policies

Government income Government spending

Taxes Public services, e.g. schools and hospitals

Borrowing, e.g. from financial institutions Subsidies on goods and services

Welfare benefits

Figure 24.4 Economic (fiscal) policies

KEY TERMS Taxes are used by governments to pay for investments they make in public services
such as education, health and transportation. Taxes may be direct and indirect.
Direct tax: the tax charged on
personal income or tax on the Direct taxes
profit made by a business.

There are two main types of direct taxes that can be paid by an individual or a
Indirect tax: the tax charged on
304 business.
the price of goods and services,
which is added to the price of
■ income tax
goods and services before they
are bought. ■ corporation tax.
Disposable income: the amount Income tax
of income left for individuals aft er

The amount of income tax charged depends on the amount of income. Th e higher
taxes have been paid.
the income tax rate the smaller the disposable income of individuals.
If the economy is in recession, the government may decide to invest in certain

sectors in order to encourage growth. This investment may be partly funded by
higher tax rates.
ACTIVITY 24.2

Hasan Ahmed is a computer software engineer for a technology company in Country Z. He has a salary of $5,000 a month.
His income level is taxed at the rate of 20%.

1 How much disposable income would Hasan have after paying tax on his income?
2 The government of country Z has raised the tax rate to 25%. What would be the impact on Hasan’s disposable income
and his spending habits?

Figure 24.5 explains the effects of an increase in income tax rates on consumers

and businesses and how businesses may respond to this.