Effects of Government on Business

Updated February 21, 2017

The effects of government on business are highly controversial. Governments do have some distinctly visible positive and negative effects on specific businesses. But in other instances, whether the government helps or harms business remains a matter of fierce debate among political advocates and economists.

Employee Taxation

Opponents to taxation feel that direct taxation reduces the incentive to work. Workers feel that their work will not earn them a significant paycheck, so they instead prefer to take advantage of government programs designed to assist them. However, those in favour of government taxation argue that direct taxation increases the incentive to work because workers put in more hours so that they can increase their earnings. Working harder can increase business income.

Employer Taxation

When businesses have to pay more taxes, they have fewer resources to invest in expansion, leading to the creation of fewer jobs. However, businesses can benefit when the taxes they pay fund projects that benefit businesses such as their own. Also, businesses do not necessarily invest in expansion when they have extra revenue.

Market Volatility

Markets are volatile, with business cycles often experiencing booms and busts. Governments sometimes lower taxes during busts to encourage businesses to invest. They also artificially lower interest rates, encouraging borrowing and spending.


Foreign investors can buy government debt. Governments eventually have to offer higher interest rates for their debt to attract more investors, which can slow down economic growth for businesses. Government debt can grow and eventually lead to a mounting national debt that the country can struggle to pay off.

Government Contracts

Many businesses have contracts with government agencies or provide services to government workers. When governments are not capable of funding themselves, they can experience shutdowns, which can have negative effects on businesses that work with government agencies. Either the businesses are incapable of finding new customers to replace the lost government agencies, or even worse, projects started by the business receive no compensation or must be halted abruptly. For example, a business constructing a building for a government agency might have to stop construction, leaving the structure vulnerable to weather and other damage.


To protect workers and customers, governmental agencies often create regulations that govern how businesses conduct operations. These regulations can place burdens on businesses, forcing them to devote resources toward satisfying the regulatory demands. However, not all research suggests that regulations, such as environmental regulations, reduce economic growth.


Under some circumstances, businesses can develop monopolies, preventing other businesses from entering into the marketplace and competing with them. Governments sometimes establish antitrust laws that prevent this. The theory is that competing businesses will lower prices and raise the quality of their goods to attract customers.

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About the Author

Charles Pearson has written as a freelancer since 2009. He has a B.S. in literature from Purdue University Calumet and is currently working on his M.A. He has written the ebooks "Karate You Can Teach Your Kids," "Macadamia Growing Handout" and "The Raw Food Diet."