Question:
Critically analyse the effect of an increase in the taxation rate on small business without subjecting the big businesses to the same while also looking at the macro economic effects on tax subjection to the business affecting their competitiveness.
This report is critically analyses the effect of an increase in the taxation rate on small business without subjecting the big businesses to the same while also looking at the macro economic effects on tax subjection to the business affecting their competitiveness. Additionally, the scope of the report aims at analyzing in depth changes in the market due to competition. Our analysis is based on porters’ five forces of competition. the report concludes that an increase in the tax rate has a significant negative effect on small businesses which are the backbone of the economy. it has been recommended that an increase in tax should not be effected.
The model of the five forces of Porter helps us to critically analyze an industry through the identification of five forces: the rivalry between the following business stakeholders; competitors, the threat of entry of new competitors, the threat of entry of product substitution, bargaining power suppliers, and the bargaining power of consumers. The Australian government tax measures or reforms to increase small business taxes will impact negatively rather than positively on the competition and the macroeconomic levels of the country. Many businesses will reduce their level of competitiveness while facing profits decline. However, the bigger business will not be affected in any way due to lack of tax increase therefore skewing competitiveness in their favor.
Expected macroeconomic effects of tax reform
But more importantly, it changes the structure of the tax system to move from a tax-based retirement (or earned income) to an accrual (or total profit) for business owners, ending the accounting records of the owners (50MINUTES.COM. et al., 2015).. When the change would take effect it would eliminate the flow of profits, but keeps the historical stock indefinitely. The combined effect of changes in the taxation of business income equivalent to increasing the tax on corporate income.
conceptually, an increase in tax, revenue reduces investment and / or increased external savings (current account deficit) of the economy. This is apparent when considering the simple identity of macroeconomics: an increase in government spending is not accompanied by an increase in private savings (reduced consumption) should reduce investment and / or net exports in Australia. The tax reform would affect more acutely the self and small entrepreneurs so since, or lose portfolio, may not affect the rise in the price they charge their clients. This makes the businesses less competitive. (De Kluyver and Pearce, 2003)
The expected rise by sector
While the system remains integrated, according to Porters five force competitive strategy as the tax payment the company an advance personal tax, an increase in the tax rate affects investment decisions that are taken at that level. Moreover, as noted, to face a possible liquidity problem of anonymous shareholders having to pay tax on an accrual basis companies, the project includes a retention of profit by the company. The investment, therefore, depends on the same variables as the demand for capital. An increase in the tax rate paid by companies raises the cost of capital and therefore decreases investment.
Effect of change in the tax base of business owners
according to porter five force competitive strategy, the change in the tax base of business owners to an accrual destroys a system that taxes to shift spending proved to be very efficient in stimulating corporate savings (retained earnings) and investment. Suffice it to recall our experience: the tax rate on retained earnings was reduced from. The consumers will tend to spend less on
In recent years, saving companies has fallen by the increase in the tax rate, increased labor costs However, two fundamental things are forgotten. The first is that foreign saving is always limited, a high current account deficit makes the economy more vulnerable to face tensions in international financial markets and ends up increasing the country risk premium. Second, that even with a more developed capital market generality of businesses-and especially small and medium companies they have limited access to it. Indeed, due to costs and transaction information to these companies often they have available only with limitations, bank financing; but they can not resort to issuing debt or equity. Even limited bank financing is subject to collateral requirements and relatively expensive. For them it is essential to provide funding internal funds or reinvested earnings.
A second transmission channel from investment tax corresponds to the availability of internal funds to finance the businesses. Since an increase in the tax paid by companies as the transition to an accrual basis for the taxation of owners, it reduces internal funds, retained earnings and investment contracts. By the way, this channel will be more relevant for companies that are financially restricted and cannot replace domestic financing for other forms of funding.
In short, a tax reform that raises the corporate tax rate and includes an accrual basis for owners incentivize retirement earnings and increased debt financing of investment for large companies. Of course, this would reduce its financial strength and the banking system. For medium and small the effect would be primarily a fall in investment (Hill, 2005). This ultimately be reflected in an economy that reduces its growth trend and therefore its ability to generate employment.
The porter five forces principle also mixes structural reform with anti cyclical fiscal policy to address the current situation of collapse of the investment. This is to allow instant depreciation for large companies only for 12 months from the enactment of the law.
Additionally, porters five force less consumption, less income, less corporate profits … lead to lower revenues through indirect taxes, personal income tax or corporate income tax would be the effect on consumers. At the same time, public spending shooting with measures to offset the decline in economic activity, such as unemployment or E. Plan More unemployed equivalent to a corresponding increase in investment in services for this cause. It just announced a six-month extension on aid granted by the government to the unemployed.
However, the impact on citizens will be different. In the short term, it will hurt mostly middle-income consumers. Increase in a tax which, in relative terms, reduces its weight as income increases, so it is expected that, once executed the rise, people with higher purchasing power may allocate more money to save. This is according to porters five forces in competition.
In parallel, it is expected that the tax hike moves from full mode to prices. It is expected a decrease in real income in the case of many families, with the danger that this circumstance will curb consumption just at a time when its take-off is required. (Roy, 2009)
This rise could influence spending decisions and household savings. In a situation like the present, when the Australian economic growth is highly dependent on consumption, raise in tax could be a brake on household spending and business. The tax reform would affect more acutely the self and small entrepreneurs so since, or lose portfolio, may not affect the rise in the price they charge their clients. This makes the businesses less competitive.
The expected rise by sector
Porter five forces principle believes that the tax increase will not favor the recovery of consumption. The tax hike should involve tax incentives to families to purchase durable household goods as well as for the reforms in taxing system.
In future entry to businesses will be affected. Due to increase in taxes, many small businesses will be denied entry to the market. Additionally, the existing small businesses will still operate albeit a small margin in profits. Bid companies which did not receive tax hikes will continue to enjoy their large market advantage having had a competitive advantage in production. The consumers will reduce their consumption due to increase in goods value. According to porter five forces of competition. The external factors are going top remain relatively the same with the internal factors having a greater impact on small businesses. Suppliers and competitors will reduce profit margins especially for small business without bargaining power. .
Following this announcement, the main organizations of traders, consumers, entrepreneurs and business sectors and professional activities have raised their voices, rejecting the tax increase, ensuring conclusively that is detrimental to their activities and citizens.
The rise in the standard tax rate will average an increase in spending of about 100 AUS per family per year, according to estimates by the Organization of Consumers and Users (OCU). The organization warns that its estimates are based on the latest data from the household budget survey prepared by the National Statistics Institute. “Whatever the final figure, what is clear is that this rise will be a brake on household consumption, and greatly affected by the effects of the crisis,”.
Meanwhile, Consumers in Action has expressed its rejection of adjustment measures announced today by the Government and especially the tax hike because “decrease the purchasing power of consumers and makes them poorer.”
Negative effects of the tax increase would impact on consumption would have to be offset by measures of economic revitalization, among others, further liberalization of trading hours “they say.
Increase in these taxes especially in small businesses will cause overruns of more Australian dollars yearly in the field by rising production costs, as has been said today or entities, so ask the Executive countervail able. The head of the Legal and Fiscal Services, José Cardona has calculated this impact by the rise of the means of production. Agricultural producers who are in the general scheme, since they cannot declare tax deductible bills to rise and not pass on increases in food selling industrial -a for example, large businesses-,do not allow the large distribution their greater bargaining power.
The model Porter’s five forces is a management tool developed by to analyze an industry or sector, through the identification and analysis of five forces in rivalry among existing competitors (Roy, 2009)
Currently in most sectors there to defeat competition and must know how to control very well the macro and microenvironment and especially if we want to survive in the market we have to differentiate ourselves from the rest and position ourselves solidly.
Factors influencing the rivalry of existing competitors:
The following factors affect rivalry in business according to porter
The forces of the threat of entry of new entrants, the threat of entry of substitute products, bargaining power of suppliers, and the bargaining power of consumers affect the strength of the rivalry between competitors, so it is usually the most powerful force five.
Analyzing these forces enables us to primarily determine the degree of competition in the industry, so we can know how attractive it is, and to identify opportunities and threats, so we can develop strategies that allow us to seize these opportunities and / or face such threats.
To compete in a market we have to differentiate ourselves from the rest so that consumers remember us either product quality, image, design, prestige, confidence, etc Product differentiation helps a lot because we won customers and maximize profits Switching costs
The government of Australia should not increase tax only on small businesses as this would reduce their competitiveness in respect to production of goods. Alternatively, it can evenly effect the 1.5% increase in tax on both the small and the big companies. It will affect consumption and consumers purchasing power while also reducing competitiveness. It should be recommended that the government lets the market forces play part in competitiveness of the market so as to impact positively on the macro-economic levels.
Conclusions
The competition gets even tougher when small business affected by the tax want to leave the market while costs are higher than stay in the market and compete, but there are other factors that restrict the output of enterprises as durable resources and expertise which refers to assets as a production plant (Roy, 2009), the cost to move to another place is too high, there are the emotional barriers, resistance to not leave the business for affective by the employer and finally the government or contractual restrictions are limitations imposed by the government to go out of business as the fulfillment of contracts with employees, suppliers, distributors, etc. according to porters five forces.
References
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De Kluyver, C. and Pearce, J. (2003). Strategy. Upper Saddle River, N.J.: Prentice Hall.
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Miller, R. (2000). Doing business in newly privatized markets. Westport, Conn.: Quorum.
Roy, D. (2009). Strategic foresight and Porter’s five forces. München: GRIN.
Shimer, R. (2010). Labor markets and business cycles. Princeton, N.J.: Princeton University Press.
Slemrod, J. and Gillitzer, C. (n.d.). Tax systems.
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Small business in federal procurement. (1986). Washington, DC: U.S. G.P.O.
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