Question

Capital Utilization Rate: The fraction of the capital stock used in production. Why might an increase in tax rates on labor lower Capital Utilization Rates?

Answer 1

Case Specifics:-

Capital and labor are both the ultimate determinants of production for any economy or company respectively. These factors combined can lead to efficient organizations coming into place in the economy.

However, the utilization of both factors must take place in an efficient manner, failing which the overall productivity tends to decline.

Capital as a resource is used in the entire production process right from procurement of raw material, to its utilization and other factors such as marketing would also require adequate capital to be able to survive.

Why might an increase in tax rates on labor lower Capital Utilization Rates?

Consider a situation, in which the tax rates payable by a firm on labor increases. They would have to shell out more money to the labor force and as a result it would deplete the overall capital available with the firm which can be utilized to carry out operations or increase the production facilities by increasing machinery or using in marketing efforts.

Thus, due to the added costs of taxes which the firm must pay towards labor force, capital gets reduced and the firm tries to spend lesser in other areas or to maintain reserves. Thus the Capital Utilization rate which refers to the amount of capital which a firm uses to increase production rapidly reduces as the availability of it declines due to added costs.

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