Principles of Business Handout

The role of government in an economy

Responsibilities of government in an economy:

The government is defined as the group of officials whose main role is to carry out the will of the
citizens and ensure that they enjoy the benefits of the resources of the country.

(a) security of the State

The government should protect its citizens in various ways. It should create and uphold
appropriate legislation and operate the courts of justice. It should provide security forces that are
equipped with the necessary resources for the country’s internal as well as external defense. The
country’s external defense will also include protection of its borders, airspace and seaspace, and
diplomatic representation in foreign countries.

(b) protection and general welfare of citizens

The armed forces will maintain law and order within the country. Most countries will have a
police force and an army or defense force. Citizens abroad can rely on the diplomatic offices to
safeguard their interests. The government will also provide social services, which include general
welfare of citizens, education and health care.

(c) job security and severance benefits to workers

Governments try to provide employment through its organizations, and also by encouraging and
assisting private sector firms. Some of the legislation ensures that citizens can have stable
employment. Organizations that wish to fire or lay off workers must comply with the law and in
some cases are forces to provide severance benefits to the dismissed worker. This may include a
financial payment and training that assists the worker finding alternative employment.

(d) protection of the environment

The government plays a very important role in protecting the environment. It creates laws that
help ensure that the air, water and soils are not polluted by harmful materials such toxic waste
and garbage. These measures are necessary because any damage to the environment has a
negative effect on the food supply, water supply and the general living conditions of the citizens.

(e) maintenance of a safe environment for investors

Investors from different parts of the world prefer to invest their money and operate businesses in
countries that have stable prices and operating expenses, low crime rate, and show signs of
steady development and growth. In order to attract foreign investors and encourage local
investors to remain, the government must provide and effective security force and keep prices
from rising too fast.

Consumer protection legislation

Consumers also rely on the government to ensure safe food, fair prices and honest business
practices. The government creates various laws and different agencies to help protect consumers.

Food and Drugs Act

This ensures that health ingredients using the correct recipe are prepared under sanitary
conditions. It applies to all products that are consumed or come in contact with the body.

Food Storage and Prevention of Infestation Act

This ensures that businesses maintain sanitary conditions of all businesses used for the
processing, storage and sale of food. It also requires that the business owner keeps proper ecords
of the process and materials used and that these records be made available to government
inspectors.

Public Health Act

Persons who handle food must have a food handler’s permit and butchers require a licence.
Premises, surroundings and materials must be hygienic.

Hire Purchase Act

This helps to ensure that the customer can voice complaints and receive impartial treatment in
the form of information or redress for unfair treatment.

Taxation

The government needs money so that it can carry out its many functions. This money is raised on
different ways. Taxation is the main source of revenue for the government.

A tax is a compulsory transfer of money from private individuals, businesses and other
organisations to the government.

The functions of taxation are to:

 raise revenue to finance government activities

 reduce consumption of undesirable products and some imports by imposing high taxes on
such items.
  Promote economic growth by influencing the choices consumers make when spending
their money.

Direct and Indirect Taxes

Direct taxes are paid by individuals directly from income earned or on the value assets owned to
the income tax department.

Types of Direct Taxes

Income Tax – This is a tax on earned income- individuals pay a percentage of their income.

Corporate Tax- This is a tax on the profits of companies

Capital Gains Tax- This is a tax on the proceeds resulting from the sale of assets, e.g. houses,
land etc.

Capital Transfer and Estate Duties- This is a tax on the transfer of property (gifts) and on
legacies (death duties)

Other Direct Taxes- These include: stamp duties, motor vehicle duties land taxes, etc.

Indirect taxes are paid to the income tax department through the suppliers of goods and
services. These taxes are levied on consumption and therefore are paid by individuals when
purchasing commodities.

Value Added Tax (Ad Valorem Tax)

This is the tax levied on goods as each stage of production. This tax generally is known as a
General Consumption Tax (G.C.T.).

Purchase Tax

This tax is placed on specific goods at retail outlets. These include gasoline, tobacco, rum etc.

Excise Duties

A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of the
product.

Customs Duties

This is a tax on imports i.e. goods entering the country.

 Description of Taxes

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared to
lower income earners. This ensures that higher income earners pay a larger proportion of their
income than lower income earners.

Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners compared to
lower income earners. This results in higher income earners paying a smaller proportion of their
income in taxes than lower income earners. For example, a purchase tax of 10% charged on a
commodity which values $100 is bought by a high income earner who receives $10,000 weekly
and also by low income earner who receives $1000 weekly. Both income earners will pay
$10.00 in taxes. This $10 represents a much higher percentage of the lower income earner’s pay
which is .01% than the higher income earner which is only .001% of his income

Proportional Taxation

Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

Government Assistance Offered to Businesses

The survival and growth of the business sector will reduce unemployment, increase GDP and
foreign exchange earnings. This sector must therefore be support and encouraged by
government.

Financing
Government assists local businesses by providing loans at low interest rates.

Protecting local industries

Custom duties charged on imported goods to protect local producers

Tax concessions
Reduced tax rates or tax holidays offered to industries will encourage production.

Subsidies
The cost of production is subsidised to reduce this cost to producers. For example, a subsidy
offered on fertilizer to farmers.

Promotion
Local and international trade shows as well as general advertisements promoting business locally
and overseas, for example, advertisements encouraging tourist to visit the region.

Training
Government agencies set up to provide technical and managerial training.

Social Services Provided by Governments

These services are provided by government to ensure the well-being of all citizens.

Education

An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.

Health

The economic development of any nation is dependent upon its population being physically and
mentally healthy. For someone to be productive he or she must be in good health.

Roads and Transportation

Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a country’s economic activities. Roads and transportation
facilitate trade of goods and services.

National Insurance Scheme

National Insurance Schemes protect the elderly and other categories of vulnerable persons within
a society. The elderly have contributed to the development of a nation and must be adequately
provided for when they are no longer a part of the labour force.