Cambridge O Level Business Studies · Syllabus 7115 · External Influences on Business Activity
Taxation
What is Taxation?
Compulsory payments to government levied on incomes, profits, spending or wealth. Taxes on personal income reduce households' disposable income and therefore the demand facing businesses that sell to them; taxes on business profits or on goods and services raise business costs or selling prices directly. The effect on any one business depends on which tax changed, who ultimately bears it, and how price-sensitive that business's customers are.
This definition is part of the External Influences on Business Activity chapter in Cambridge O Level Business Studies.
Taxation in context
Government policy, environmental and ethical expectations, and globalisation are external forces a business cannot control but must trace through to a specific effect on itself. A change in taxation, government spending or interest rates reaches a business's costs, prices, demand and cash flow by a different route each time. A private cost is paid by the business itself; an external cost falls on a third party outside the decision — residents living with pollution, for example. Appreciation of the home currency helps importers and hurts exporters, and depreciation does the reverse, so the direction of any exchange-rate effect depends on naming the currency and the firm's position.
Questions students ask about Taxation
What is the difference between a private cost and an external cost?
A private cost is a cost the business itself pays, such as a fine or a clean-up bill. An external cost falls on a third party who was not part of the decision and does not appear in the firm's own accounts, such as residents living with air pollution from a factory. Because an external cost does not affect the firm's own figures, it does not influence its decisions unless regulation, taxation or reputational pressure brings it in.