Question

In a business owner's perspective, how does federal taxes affects some aspect of the owner's business decisions?

Answer 1

Federal tax directly affects the owner's decision making in many ways. some of which are the following:

1) Debt: It gives a push to bring debt to the capital structure to get the tax benefit on debt which increases the leverage effect. small business with decent debt proportion get huge tax advantage which increases the ROI for its equity participants.

2) Location: Different tax rate in different states directly affects the decison making on start a business in the perticular region to save tax burden and get more profit for the owners/ and equity participents.

3) Timing: as you can see tax rates and exemption limit are different in different tax period. and its changes as per government decision. which directly affect the business decision. A more tax exemption in a particular area will attract the owner's effort on that area to get more tax exemption which will increase his income without the tax burden.

4) Gains: Capital gains directly affects by timing. if there are huge short-term capital gain tax and no tax on long-term capital gain then investors try to hold the investments to 12 months/ such period which make the transaction as long-term capital gain instead of short-term so that no tax need to be pay. which reduce the speculation transaction and increase fund availability in the market as an investment.