ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business
A government increases the rate of corporation tax and at the same time cuts the rate of tax relief on capital expenditure. Which of the following is the most likely effect on businesses?
Higher corporation tax lowers profit after tax, and reduced tax relief on capital spending makes new assets less attractive. Together they cut expected post-tax returns, so businesses are likely to reduce investment rather than increase it.
- AIncreased incentive to invest in new non-current assets
- BReduced after-tax returns on investment, so investment is likely to fallCorrect
- CLower prices for imported raw materials
- DImmediate fall in the rate of inflation caused by lower demand for labour
Explanation
Higher corporation tax reduces profits after tax and less capital expenditure relief makes investments less attractive. Together these lower expected post-tax returns, so firms are likely to invest less. The incentive option is the opposite of the effect, and the other options are not direct results of these fiscal changes.
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