Page 307 - Cambridge IGCSE Business Studies

24: Government economic objectives and policies

Business response
Businesses focus on cost
reduction so that they can
offer competitive pricing
Effect on business to attract customers.
Less demand for goods
and services leading to
fewer sales for businesses.
Business response
Effect on consumers Firms reduce production
A reduced disposable income levels.
so consumers spend less
on goods and services.
Business response
Effect on business
Businesses may decide to
Employees may not be
motivated to work as hard, provide more fringe benefits
affecting production. to compensate and
improve motivation.

Figure 24.5 The effects of an increase in income tax rates

Corporation tax

This is the tax paid by businesses on the profits they make. The higher the

corporation tax rate, the smaller the profi t after tax available to businesses.
If a country is in recession and the government’s objective is to encourage
economic growth, it can lower the corporation tax rate.
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ACTIVITY 24.3

Company XY wants to expand its operations in a foreign country. It looks at the corporation tax rates in Countries A, B and C

to see which country offers the best business environment for them.

Country Corporation tax rate (on income Tax paid ($)
less than $1,000,000)

A 28%
B 26%
C 32%

1 Assuming a profit of $600,000, copy and complete the table to show the tax that Company XY may have to pay in each of
these countries.
2 Which country should XY expand its operations in based on the corporation tax rate?
3 What is the corporation tax rate in your country? Do you think it is competitive with neighbouring countries in order
to attract foreign investment? (Hint: Use the internet or ask your teacher to provide you with business newspapers or
journals to do your research.)