Winston
Platinum Member
The problem is you refuse to see the solution, increasing the marginal corporate tax rate.
Since the WACC is inversely related to the marginal tax rate, a lower marginal tax rate actually DISCOURAGES the very type of investment that you are advocating, investment to boost productivity. Lower marginal tax rates encourage corporations to SEEK RENTS instead of seeking capital investments. Further decreases in the corporate tax rate will only add gas to the fire you are complaining about.
I disagree, IMHO eliminating taxation on production doesn't encourage rent seeking quite the opposite for a few reasons:
1. Corporate income taxes encourage influence buying since owning the politicians and bureaucrats that write the tax code is a very cost effective way to lock out potential competitors while protecting your own interests.
2. Corporate income taxes encourage speculation rather than investment since by taxing production while at the same time infusing the system with moral hazard the rewards and time horizons from speculating become far more attractive than the rewards from investing in actually building things/providing services that consumers want and need.
3. Corporate income taxes are in the end taxes on productive investment since as I've already explained they are part of the equation that determines capital flows; corporations must compete for capital based on the returns they can offer that capital and the current tax regime completely distorts the playing field.
4. Corporate income taxes waste an enormous amount of resources and effort in the form of the lawyers and accountants they require just to shuffle all the paper around pursuant to compliance and filings.
Taxing naked speculation and consumption is fine, taxing production leads us to exactly where we are today, with stagnant/falling real wages, increasing income inequality, low/no economic growth and a giant casino where our financial sector used to be; been there, done that, not working and more of the same isn't the answer.
Please. Again, you are totally ignoring RISK. Look, corporations are not that much different than people. They are not as concerned with the return ON their money as much as they are concerned with the return OF their money. In short, companies don't just evaluate a capital project's possible profits, they also evaluate the RISK of LOSS.
The CEO doesn't go, how much can we make? The CEO asks, how much can we lose? If the marginal tax rate is zero, then the entire investment is subject to loss. If the marginal tax rate is fifty percent, then the government subsidizes the losses, only half the investment is subject to loss. Here, let me try to help you understand.
Think of the poker table. When you start you are on the hook for every dime of loss. Essentially, your corporate tax rate is zero. Strategically, you play your cards conservatively, minimize your risks, and make only high percentage plays. After a couple of months, well let's pretend you made some mad cash. Now, if you lose a hundred dollars of your winnings you can write those losses off against your winnings. Now, that hundred dollar bet is not all lost. If your marginal income tax rate is 25%, you only lose seventy five bucks.
Now, well you can make more aggressive bets, you can take more risk. Hell, you might even stroll over to the craps table. Now, think of those large corporations, like GE, who often have a zero corporate tax liability, a zero marginal tax rate. They are playing their cards conservatively. They are highly risk averse. Instead of making capital investments they use profits to seek rents. Meanwhile, the small firms that pay the actual corporate tax rate because they don't have armies of accountants and lawyers, where the tax department is not a PROFIT CENTER. They don't seek rents, they make capital investments to EXPAND.
Small firms pay a higher marginal tax rate and do not engage in rent seeking while large firms pay a lower marginal tax rate and engage in extensive rent seeking. Now, try here,
http://rcbrnet.com/journals/rcbr/Vol_5_No_1_June_2016/3.pdf
That study shows that six OECD countries have a higher effective corporate tax rate and LESS rent seeking. Increasing the corporate tax rate would reduce rent seeking and stimulate more aggressive capital investments.