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Friday, November 21, 2008

Corporate Taxes

Let us define three all-encompassing categories of resource usage: consumption, investment, and government services. Draw the lines wherever you see fit.

Ideally, the purpose of taxes is to shift resources from consumption to government services.

Corporations do not consume anything.

Ergo, taxing corporations shifts resources away from investment rather than consumption.

In an ideal (from a progressive* standpoint?) economy, this would be flawed reasoning; the corporations would simply reduce profits and the shareholders would reduce consumption by a corresponding amount. Investment would be unchanged.

In an ideal (from the standpoint of someone who understands basic economics, ie not a progressive) but simplistic economy, taxes would reduce consumption and investment by X and Y amounts, and the values X and Y would be constant no matter where the taxes were applied.

As models get more advanced, but maintain the pretense of superrationality**, various things happen. Corporations are by definition owned by people who devote a higher proportion of resources to investment. Thus taxing them reduces the ratio of investment to consumption even more than taxing wealthy individuals, many of whom are playboys, heiresses and dilettantes of various stripes.

Without perfect rationality, does the same amount of taxation on the same individual have a different effect if it is taken from the corporation rather than from dividend income? What is the effect? Do the corporations reduce profits solely or do they also reduce their own investment?

Would investment increase because of lower required rates of return? Unlike most of the absurdly simple things that politicians can't seem to grasp, this isn't immediately obvious.

At any rate, it's simpler just to soak the rich rather than indirectly soaking the rich via corporate taxes. Plus think of all the effort that it takes to do corporate taxes in the first place! There's like a million accountants working on them around the clock!

*What I've settled on as a name for American socialism

**Perfect information and perfect decisionmaking


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