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possible effects of government on businesses

Explore and explain the possible effects of government on businesses, take the financial situations individually, and explain and analyse the possible effects on the business situation:

1) The government makes a substantial rise in interest rates
2) The government makes a substantial rise in income tax on all levels

A) business situation : a large retailer of electrical goods like TVs and Comuters, like DIXONS or CURRYS

Solution This solution is FREE courtesy of BrainMass!

What would happen to a large retailer of electrical goods if interest rates took a big hike? First of all, why would a central bank consider raising interest rates? What does an increase in interest rates do? Generally, when interest rates are up the cost of borrowing money is more expensive, right? I mean, after all, that's what an "interest" rate is. It's the cost of borrowing money. When interest rates are high, money is expensive. When interest rates are low, money is cheap. That means that the cost of borrowing the money is low.

Now, let's consider what high interest rates do to people in debt. Since the interest rate has gone up, the cost of their borrowing (and hence, the cost of their loan/debt) goes up. Therefore, for those in debt, finances get worse. They have to pay more to the loaning agency to keep the loan.

However, what about the effect of high interest rates on someone who has lots of money and doesn't need to borrow. Well, he can loan his money, right? That's another way of saying that he can invest it. Therefore, when interest rates are high, investments become attractive because there is a higher rate of return on the investment.

High interest rates usually attracts foreigner investors. It's a way to entice investors to dump their money in that country. Another way to think about it is this: Who wins? High interest rates favour companies and individuals with lots of cash.

Therefore, what will happen to our retailer? What does this retailer sell? He sells electronic goods. Those are commodities that are not crucial to people's lives. Those are what we might call "extras." When all the bills are paid and there is money leftover, then we might entertain the notion of buying a new TV or a DVD player. Fair enough?

If interest rates are high, will you be more prone to buy such goods? I don't think so. After all, most citizens in the western world are already in debt. Therefore, more than likely their monthly payments on those debts will increase, making it harder to have extra cash around. In addition, a lot of people buy on installment plans. Once again, that's just another way of saying they're borrowing the money. If interest rates are high, the monthly installment payment will be higher.

Now, let's look at the retailer itself. Perhaps he's also in debt. Perhaps the store has undergone an expansion in order to reduce taxes, or has borrowed money for renovations, or just to keep up inventory. Therefore, interest rates going up means more money out of his pocket to pay his debts.

So, rising interest rates is not a good move for the consumer economy.

What about increasing income taxes on all levels. First of all, let's talk about income tax. Why do governments have income tax? You do know that in America (and in Canada) a tax on income didn't start until World War I -- as an excuse to help defray the cost of war. Well, consider what happens. We have paper money. That means that it's phony money, because real money is precious metal coins such as gold and silver. It's very difficult to inflate metal coins. Yet, it's really easy to inflate the money supply when all you've got are pieces of paper -- or electronic dots on a screen. How can you inflate? Just print more money (or have the banks loan more money)! That's what inflation is all about. However, in order to keep the public in the dark, the government taxes us. What's the connection? By giving the government back much of its inflated money, we don't see the immediate effects of the inflation. In fact, most people think that inflation is rising prices. No, not at all. Rising prices is the natural result of inflation. And who controls inflation? The central banks. Why do they do this? To control the economy.

Therefore, what happens when income taxes go up. Let's look at the consumer again. He has to pay more income tax; therefore, he's got less money in his pocket. That means that he's got less buying power. How did he end up with less buying power? Remember the old inflation trick. He ended up with less buying power the moment the central bank inflated the money supply by rolling dollar bills off the printing press. (There are other ways that banks can inflate the money supply, but that's beyond the scope of this posting.) The only problem is, he thinks that he has less buying power because he's taxed more. You see how he's deceived. He's taxed more to hide the inflation. It was the inflation that reduced his buying power in the first place. So, obviously, when taxes go up, inflation must have gone up, and the value, i.e. "buying power," of an individual dollar (or whatever unit we're talking about in the respective country) goes down.

Bottom line? The dollars that the consumer has will be worth less -- or he will have less of them. Either way, it amounts to the same thing. Therefore, he will probably think twice about buying that new TV.

What about the retailer itself? Same thing really. He's got to pay more taxes on his profits from the store. Therefore, he's got less buying (or investing) power to improve his business. He'll think twice about expanding or renovating. After all, he needs to take home a paycheck.