Changes incurred on various types of taxes in the tax system have specific influences on the economy in any country. Personal tax can influence price levels in a given economy whereby a reduction in such kind of tax leads to a reduction in the general price level on most of the consumer goods. This is mainly done to favor the general public. Taxation adjustments could be done alongside policy adjustments as a way of attempting to reduce tax. While this is done to favor the consumers in the economy, there are certain implications on the economy as well as on individual firms. Deducing tax in favor of the public has implications on firms’ productivity and their general performance.

A firm’s manager has the obligation of addressing any changes in the tax policies especially when the personal tax system is changed. Policy adjustment in the tax system should be addressed after they are made effective so that employees adjust accordingly (Robert, 2000). Personal tax reduction is known to increase the net income of employees. The increase in personal taxes could mean that employees are highly motivated to an extent that their productivity may increase (Robert, 2000). This could be used by the management as a factor behind their immediate response to make it clear on the prevailing tax policies. It may however seem difficult to address the issue when the tax policy change is on a personal tax increment. Increasing taxes has a direct effect of influencing motivational behavior of employees. This happens because their buying power reduces making it more difficult to afford all goods and services they used to afford before the policy change.

Reduction or increment in the personal tax policy has an impact on the price level in an economy. The effect on price level is never direct by is a problem initiated by the changes in consumer buying behavior. Consumers would respond to personal tax deduction by buying more of the goods and services they used to buy. The increase in demand is reflected to the increase in personal tax. In this case, of increased net income, every affected consumer in the market would now turn into a buying behavior in which they would choose larger baskets of goods or services (Gerald, 2008). This is done while every consumer tries to go higher on his or her indifference curve where the utility level is higher as well. Unfortunately, this hardly holds for long since consumers turn to the cheaper baskets whose utility level is less than initially when the price level starts to shoot up. They finally find themselves in an indifference curve lower than their initial indifference curve but this comes as the market forces of demand and supply resists the increased demand so that the market restores back to equilibrium (Robert, 2000).

Once the utility level of consumers is lower, consumers’ demand for goods and services becomes low as well. The market has its unique demand and supply forces in which people resist from purchasing goods at elevated prices while suppliers marked by various firms resist selling their goods and services at price lower than at a certain level. These two levels from both the consumer and supplier sides bring about the market equilibrium (Robert, 2000). Any adjustments on either of the two sides create a change in the market equilibrium and the productivity by firms.

In this case, study personal tax creates an increase in the net income of employees who turn out to be consumers of products and services from various firms including those firms they work in. The first implication is an increased productivity initiated by employees’ motivation from the increment in their net incomes. This holds for a while and could be strengthen by an increased demand since people now have higher income than before (Gerald, 2008). The firm in this case would increase its productivity in order to meet the prevailing demand. The increased demand is created by consumers as they try to maximize their utilities by buying more goods and services.

The other effect on the economy that subsequently creates effect on firm’s productivity is the increased money supply in the economy. This is a condition whereby people have more money than they used to have before and hence demand more of goods and services. To respond to the increased demand, the firm in this case, together with other suppliers would increase their supply through increased productivity of goods and services. Since the demand is high, suppliers sell their supplies at higher prices thereby increasing the price level in the economy. This creates conditions of prices failing to fall back once the demand decreases (Robert, 2000). The reduced demand comes in because of a reduction in the real income of consumers. Prices are flexible upwards but sticky downwards an indication that, firms are not ready to cut down the prices for their goods and services. This also happens to the firm in this case study and under such situations, the firm would respond by cutting on its productivity. Cutting down productivity is done to avoid unnecessary losses arising from excess supply over the prevailing demand. Cutting down the firm’s productivity is done up to a point where the marginal productivity is equal to the marginal revenue of the firm (Robert, 2000). This condition may bring about many adjustments within the firms including resource utilization and labor structure.

The structure of the firm would have to be adjusted once the policy creates a low demands because of increased price level in the economy. The capital of the firm may be fixed to an extent that any adjustments done affect the labor side of the firm. A reduction in productivity would imply that resources are underutilized by the firm. The management has to come up with an effective way of dealing with the inefficiency created (Robert, 2000). The best option is to substitute labor for capital so that the firm would be more capital intense than labor intense but only if the capital is fixed to an extent that the firm can hardly run without much of capital than labor. Decrease in productivity causes the marginal productivity of labor to decrease. In this case, much of the labor would be less beneficial to the firm. Given the firm would be more interested on quality than on quantity, capital intensity would be more important than labor intensity. The goal is to capture more consumers at a higher price to maintain the firm’s level of profitability.

The firm in this case study and its general business environment would be affected to a certain extent by both internal and external factors. Internal factors affecting the firm’s business environment would include issues revolving around labor and capital, both financial capital and human capital. On the other hand, external factors include external forces including government regulations, competition from other firms, economic conditions, and the geographical environment. Labor and capital are internal factors and determine the quality and quantity produced and supplied in the market. Poor management strategies in substitution labor for capital or substituting capital for labor would require high skills as part of the human capital (Robert, 2000). In this case, since productivity freezes as the market demand goes down, some workers do not add to the marginal productivity of the firm while capital remains constant. The excess labor should be suspended. Bringing this condition causes an adjustment from quantity focusing to goal setting on quality improvement. Poor or inadequate skills could also lead to poor strategic management and underprivileged decisions on productivity and marketing. Skills are always upgraded to keep employees and management up to the prevailing technologies. Technology here comes in as both an internal factor influencing the firm’s business environment and an external factor having an influence on the same. As an internal factor, technology is part of the human resources that is initiated to improve on capital productivity.

Incorporating advanced technologies would make the firm operate better on more capital intense condition than on labor intense condition. Quality products and services because of technology favor the firm’s business environment. Higher technologies from competitors bring down the firm’s performance within its business environment. The firm also has to observe other external forces such as the government regulations and policies like the case of tax deduction or increment (Robert, 2000). There should be a way of projecting on the future negative outcomes and create strategies that would save the firm from such effects. When the government generates policies in favor of the general public or consumer, there would be a positive impact and a negative impact from the policy. It is good to aim at maximizing benefits from the positive side of the policy but still generate mechanisms that would curtail and negative effects on the firms especially if the effect is realized in the long run. The same caution has to be applied on the effects of the firm’s business environment by environmental factor. Every good aspect of environmental factor influencing the firm’s business environment should be observed as well for the firm to maximize on the related benefits. The firm would only advance under bad business and economic conditions given that all good aspect of both its internal and external environments are utilized with mitigation measures be taken on any foreseen negativities.


Gerald Auten, R. C. (2008). The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the Taxable Income Response. National Tax Journal, Vol. 61 No.3 , 345-364.

Robert Carroll, D. H.-E. (2000). Income Taxes and Entrepreneurs: Use of Labor. Journal of Labor Economics, Vol.18 No.2 , 324-351.