How do you think tax affects entrepreneurs? Do you give negative connotations to taxes when it comes to its effects on entrepreneurship? Most of us only think that tax discourages hard work and wealth creation. This is a narrow thinking and we miss the mark; how positively and negatively taxes affect us. At its best, tax policies drive innovation.
Taxes influence the incentive to innovate. Moreover, high income tax rates and inefficient tax structures influence innovation and entrepreneurship. Everything has gone online including tax remittance. This is the time to have a social media platform. Do you have a presence in tiktok? Do you get traffic? If not, buy TikTok followers to create more awareness about your business. Here are some ways in which taxation affects entrepreneurs and their decisions.
Income tax affects number and location of innovators
To some extent, the decision to become an innovator is shaped by personal factors .Even so, research shows that financial incentives play an important role in determining the innovators decisions. For instance, a recent study indicated that with a 40% increase in the income tax rate, the number of those filing for patents dropped by 48% percent.
Whether at personal or corporate level, income tax has a negative correlation with the state level innovation and the behavior of individual innovators. The lawyers at Goldstein Patent Law share that normally, application of patent marks peak of an innovation. According to Akcigit, an increase in taxation rate by 1% leads to reduction of patents and citation rate by 6%. This indicates that heavy taxes reduces the likelihood of potential innovators getting into them.
More than reducing the number of entrepreneur’s nationwide, entrepreneurs become concerned about where to live. How does this affect economic performance and policies? All factors constant, most entrepreneurs migrate to areas with lower tax rates. This may lead to unequal economic development and distribution of resources. Moreover, it may have an end result of localization of industries. Many people will be attracted to one area. It’s important for the government to take note of these even as they try to have manageable taxes for the citizens.
Income taxes affect the quality and quantity of ideas.
Even more than the number of innovators, the quality of ideas they bring is of great importance. Private gains by entrepreneurs are positively correlated to their businesses. Increase in income tax may limit the entrepreneur’s ability to create businesses with large social impact on the community. Think of it in terms of sole proprietorship.
The business owner sources funds and makes all decisions. Therefore if conditions are favorable, some of the income gained on personal investment will be injected into the business. Wait. But what is the effect of income tax on the income of entrepreneurs? Income tax does just the opposite. It cuts the income of entrepreneurs. This in turn has adverse effects on entrepreneurial activities as more entrepreneurs will not be passionately involved in the business.
Taxes affect the availability or lack thereof of supernormal profit.
By taking advantage of the differences in market prices, entrepreneurs try to obtain economic profit. For their risky behavior, entrepreneurs are compensated by supernormal profit. Absent of this reduces the likelihood of an entrepreneur to go for a risky venture. For instance, If a 50 % chance of getting 10% return on investment returns only 5%, then the expectations of the entrepreneur will be let down. The entrepreneur may not take any other risk in a bid to do other activities which are less risky. Policy makers are always caught in a dilemma of how to tax supernormal profit as it may result from risk taking behavior of the entrepreneur, luck or skewed competition.
Effects of taxation on the entrepreneurs fixed costs
Fixed costs that result from taxation affect entrepreneurs differently as compared to variable costs. Fixed costs are the expenses which do not change with increase or decrease in volume of goods produced. Examples of the fixed cost that all entrepreneurs must adhere to are tax compliance and complexity; they must be met by all entrepreneurs before getting into any industry. This condition influences the decision of entrepreneurs to enter or to exit a business though they also influence the amount of goods produced.
Taxation determines the route taken by entrepreneurs in several ways. Corporate income tax is mainly associated with negative effects on entrepreneurship. What should an entrepreneur do to take care of all these before giving it up? Now, there are government websites with all policies on taxation. Familiarize yourself with them so that you may benefit from them.