Question

How will investment spending be effected when greater level of taxes are placed on business earnings?

Answer 1

Answer: Definitely, an increased taxation will affect the investment spending. An increased taxation will reduce the willingness to work save and invest. Every single tax is considered as a burden on the tax payers. If the government imposes higher taxes on the business earnings it will reduce the investment spending in the economy. Investers will feel that it is not worth taking new investments and increased production. As in the case of prgressive taxation as income increases the taxpayers have to pay more on tax.

In the case of investment spending, the investors will take into consideration on the rate of interest, Marginal Efficiency of Capital, Business Environment, Government Policies and taxation. If the taxes on a particulr investment project is very high, then such type of investment will not comeforth in the eonomy, because the establishment of such type of investment necessitates the payment of higher taxes. In the case of existing investments, an increase in their business activity will bring about an increased earning. But as far as the taxes are high, they have to pay more tax on the incresed income. This will work as a disincentive for further investment spending by the firms. Thus, an increased taxation will reduce the investment spending in the economy.