How taxes affect the overall economy
- As much as it may pain you to hear, your hard earned money paid in taxes to your Government forms a financial backbone of your country. In many countries, small businesses are often the biggest employers and are significant contributors to the tax base. So the roads you drive on, the police, schools, water, and garbage are all directly or indirectly being paid for by you. And given that you get the benefit of some, if not most of these services, taxes aren't all bad. What happens to the overall economy effects small businesses, so for you, it's important to stay informed about macro-signals and policy changes that can impact your business. The most obvious thing to watch is overall tax rates. A tax hike or cut can make a huge difference to your bottom-line and the revenues of the Government. Federal state and local Governments can impose taxes and levies. Indeed tax is one of the few strategies that the Government has to both win favor by promising to lower taxes or increase their income and provide more services by raising taxes. It's important to have a basic understanding of fiscal policy. The two levers of fiscal policy are taxation and spending. If the economy is contracting, which usually means low growth and higher unemployment, Governments can step in and try and stimulate the economy with increased spending and tax cuts, or both. The thinking here is this; if people have more money to spend, the economy will return to a growth state. But what happens when there's been a long period of expansion? If the prices of things are going up, that's inflation. Sometimes Governments reduce spending to slow down the economy. Sometimes they even talk about raising taxes although that really goes down well with their constituents. But know that both of these will impact small businesses significantly. As a side note, Governments can also use monetary policy to move the economy. We're talking here about interest rates. The higher the interest rate, the more expensive it will be to borrow money to grow your business. Kepp your ears to the ground for monetary policy changes. So make sure you're tracking where you are in the current economic cycle in your country, remembering that what goes up eventually comes down. It may not seem like you can do much about it, but knowledge is power. Implementing good financial health practices when time are good can help a lot if the economy turns south. The bottom line is that every dollar you pay in tax is one dollar that's not going into growing your business, so it's important to understand from a macro-level how policy changes can impact your business. Pay attention, get involved, and remember that collectively, small businesses are the economic engine of most countries, so be proud of the work you do each day.
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