PRINCIPLES OF BUSINESS



PRINCIPLES OF BUSINESS

SECTION 8: ROLE OF GOVERNMENT IN AN ECONOMY

Responsibilities of Government in An Economy

1. Security of the State:

The country must be protected from outside/foreign forces by the army, coast guard etc. Assistance can also be received from other nations where a country lacks the ability to protect itself.

2. Protection and General Welfare of Citizens:

It is the duty of any government to create and amend laws which would be beneficial and protect the innocent of the society. Laws must also be enforced through the courts as well as the police force. There should also be the provision of social services to safeguard the welfare of the citizens.

These include:

❖ Education

❖ Health services

❖ Utilities

❖ Proper road network

❖ Telecommunication

3. Job Security and Severance benefits to workers:

Governments can help to make sure that the jobs of many of their citizens are protected by having legislation through which government workers can be appointed to the government/civil service. Government can also enact labour laws to ensure that workers in both the private and public sectors are not treated unfairly or dismissed without just causes. Throughout the Caribbean, workers and employers are required to pay national insurance. This is to make sure that in the event of sickness, injury or severance, worker would still receive some payment as long as the necessary contributions were made.

4. Protection of the Environment:

This can be carried out by the following measures:

❖ Legislation/acts of parliament which would make certain acts such as dumping and other offensive practices illegal. There would be fines or other sanctions attached to discourage the various forms of pollution. These laws can also indicate where industries are to be located.

❖ The zoning of certain areas which would become national parks or reserves. This may be done to protect certain species of plants or animals which may be considered endangered.

❖ Various seminars, lectures and workshops and other awareness material can be offered in schools and communities, especially among the young people, showing them that what they do today will impact negatively on those to come.

❖ There can be regular impact studies and statements of the land, air and sea. This will assist in keeping track of the conditions of the environment.

5. Management of the Economy:

It is the government’s duty to ensure that there is economic growth and development in the country. The standard of living should also be improving, meaning that people can live better lives, with better health care, education etc. The government needs to control the country’s rate of borrowing, so that the national debt will not become unmanageable. There must also be adequate foreign reserves to cover the cost imports for a reasonable amount of time.

6. Maintenance of a Safe Environment for Investors:

Persons/organisations wishing to make investments into a country must feel that their capital

will be safe. They should no be made to feel that there is political unrest which will destabilise the economy. If there is growth, then investor will get a return on their capital. The level of crime must also be controlled.

How can Businesses Protect the Environment (Physical & Economic)?

➢ Adhere to business laws e.g. taxation (income, corporation, VAT), copyright, health etc.

➢ Comply with labour laws

➢ Have a proper working environment which is safe for workers

➢ Having a good relationship with workers and their trade unions

➢ Proper disposal of waste

Importance of Environmental Protection and Preservation

▪ The quality of life is enhanced. e.g. a reduction in the greenhouse effect

▪ The flora and fauna is protected

▪ There is sustainable development. This is the careful use of elements of the environments by people today, while ensuring that later generations will still be able to have adequate use of the same resources.

▪ Harmony between workers and employers which can improve productivity.

▪ Increased investment may occur

Measures Used by Government to Protect Consumers

1. Price Controls:

These may include setting a price ceiling on goods so that all persons can purchase certain products, especially necessities. This also keeps suppliers from charging excessive prices.

2. Encouraging/endorsing consumer protection agencies:

When this happens producers/suppliers will be sent the signal that substandard products will not be tolerated on the market and that they are in fact being monitored.

3. Consumer Protection Legislation

This includes laws regarding:

▪ Food and Drug Standards

▪ Hire-purchase legislation

▪ Health and Safety Standards

▪ Laws relating to the sale of goods, looking at quality, labelling, weights and measurements, guarantees etc.

All the above helps to make sure that consumers get a fair deal and receive what they pay for.

Government Regulatory Control on Businesses

1. Legislation:

Acts of parliament can cover such issues as, laws relating to zoning, disposal of waste etc.

2. Regulation:

Regulations have to be followed when setting up businesses e.g. filing with registrar of companies, memorandum and articles of association governing the internal and external operation of businesses which have been incorporated.

3. Taxation:

Sometimes governments may offer reduction in taxes or tax holidays to encourage businesses to set up in the country or specific area.

4. Subsidies & Price Controls

Subsidies assist producers to purchase products at cheaper prices. Hopefully these saving will be passed on to the final consumers. Price controls are used on goods which the government feels should be available to all in society at a reasonable price. It usually includes goods such as staples e.g. rice, flour, some milk products, public transportation etc.

5. Provision of training for workers

This can help to improve the productivity of businesses as workers are taught how to perform their jobs more efficiently. This can lead to greater profitability and expansion of operations. As businesses expand, the government will be able to collect greater revenue through taxes (income tax, corporation tax, VAT and other duties)

6. Factory Space/Low Cost Rent

Government offers these incentives in an effort to reduce the overall cost of production of business. This is in an effort to keep the cost of the final products at a reasonable level to consumers. It is often used to help struggling local industries or to attract foreign investment.

Social Services Provided by Government

1. Educational Facilities

This includes pre-school, primary, secondary and tertiary institutions, training boards etc. This encourages the improvement of skills as well as entrepreneurship. As the population becomes more informed and literate, the overall effect will be an increase in employment and eventually an increase of revenue for government.

2. Health Facilities

Hospitals, polyclinics, homes for the elderly (geriatric homes). As health care improves in a country, it will positively affect the country in the following ways:

❖ Healthier citizens

❖ Longer life

❖ Reduction in diseases

❖ Reduction in death rate

As people live longer, there will be areas in the country which will be impacted upon such as the availability of jobs, housing, national insurance and overall growth of the population.

3. National Insurance

Most countries have legislation regarding a national insurance scheme which includes:

❖ Unemployment benefits

❖ Death benefit

❖ Maternity leave and benefit

❖ Disability benefit etc.

The aim of the national insurance scheme is to act as source of income in the event of certain adverse activities e.g. death, injury etc. It also provides security for the elderly upon retirement.

4. Infrastructure

This includes the provision of roads, running water, electricity, telecommunications etc. This improves the standard of living of citizens and encourages investment from business, which in turn will stimulate economic growth. There will also be greater access to goods and services.

TAXATION

Taxation is the compulsory payment made by citizens and corporations to the government, for which no direct benefit is given in return.

Direct Taxes:

Taxes that are incurred directly by a person or organisation e.g.

❖ Income tax

❖ Corporate tax

❖ Capital transfer and estate duties

Indirect Taxes:

These taxes are placed on goods and services and are included in the final price e.g.

❖ VAT

❖ Sales Tax

❖ Customs duties

Role of Taxation

1. Raising Revenue

Governments will earn money as it collects the various forms of taxes.

2. Income Redistribution

Persons who are lower income earners will pay less tax.

3. Control of Spending

Higher taxes /duties are applied to goods for which the government hopes to reduce consumption e.g. alcohol, tobacco.

4. To Protect Local Industries

Higher taxes are usually placed on imported goods to reduce their attractiveness, while encouraging the consumption of the cheaper local product.

N.B. In some cases, the above can also be seen as positive effects of taxation.

Negative Effects of Taxation

1. Taxes such as VAT can raise prices creating higher inflation.

2. Taxes can lead to a poverty trap. As the pay of some people rise, they may not be able to collect certain kinds of benefits and they may also have to pay higher taxes, leaving them worse off than before.

Progressive Taxation

The higher the tax payer’s income, the higher the absolute amount of tax paid as well as the proportion of income.

Regressive Taxation

As a person’s income increases, the percentage of tax paid will decrease.

Proportional Taxation

All taxpayers pay the same proportion of his income in tax. The wealthier individuals will pay more in absolute terms but he will still be better off.

Exercise

In 2004 and 2005, Paul’s income was $3000 and $6000 respectively. Below is a table showing the various tax brackets for the years.

|TAX BRACKET |RATE OF TAX |

|The first $1000 |0 % |

|The next 2,500 |10% |

|The next $2000 |15% |

|The next $1000 |25% |

1. Calculate how much income tax was paid in each year. (8 marks)

2. Calculate the percentage of income which was paid as income tax each year (4 marks)

3. Is the method of taxation, progressive, regressive or proportional? (1 mark)

Show all working

Worksheet

Role of Government

1.For each of the following statement, determine which role of government applies:

a) Creation of laws -

b) Provision of utilities -

c) The Police force and the Army -

d) Unemployment benefits -

e) Education and health care -

f) Management of foreign loans -

g) Creating a budget -

h) Legislation on dumping -

i) Labour laws -

j) Zoning of areas as parks or reserves -

2. What are TWO measures used by government to protect consumers?

3. State THREE functions (reasons) of taxation.

4. What is the difference between an indirect and a direct tax and give an example of each to support your answer.

5. Explain ONE reason why the physical environment should be protected.

6. Explain ONE reason why the business environment should be protected.

7. State ONE which in which business can protect

a) the business(economic) environment

b) the physical environment)

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