Answer to Question #242025 in Macroeconomics for Mnb

Question

South Africa has great need for investment by the private sector. How would the income tax on companies affect the decision of an entrepreneur to invest?

Answer 1

Companies need to pay taxes on the basis of the income earned. Therefore, tax is an expenditure of a company. Higher the rate or income tax, higher would be the total tax outlay of a company given its income. So, a company is more willing to invest when the tax rate is low and less willing to invest when the tax rate is high. This happens because a lower tax means a higher profit for a company. So, the country can increase investment by lowering the tax rate. When the tax rate is lower, entrepreneurs would be more willing to invest. This is the reason countries that want to increase investment often lowers the tax rate.