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A rise in the tax rate on businesses leads to a decline in the desired level...

A rise in the tax rate on businesses leads to a decline in the desired level of capital and a decrease in investment.

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Answer #1

Yes, it true that the increase in the tax rates on the business leads to a decline in the desired level of capital and a decrease in investment.

Let's assume a situation where the tax rates are very high. In such a scenario, business has to earn more profit so that they are left with some amount of money after paying taxes. If their profit is less they will end up losing all their money in taxes and other expenses and they may not start their business as well and wait for the moment where the expected profit increase or taxes fall.

In case of high taxes, only those business start functioning where the businessman can make sufficient profit if taxes are less. When the taxes are low it will attract more business and investment even when the expected profits are less.

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