For your viewing pleasure

CNBC has had, what I think, is very good coverage on the financial debated.

Last night the Senate passed their version of the "bailout bill", tonight the vice presidential candidates will be duking it out, tomorrow the house will be voting on their version of the "bailout bill". Needless to say we have an endless supply of pundits blowing hot air.

Anyway, I will express one of my pet peeves. Many of the pundits claim that we need to reduce taxes on business to stimulate the economy. This is hogwash. I cover this issue to a degree Idle Observations on Election Year Tax Rhetoric.

As a very simplistic explanation, if you reduce taxes on business that means the consumer has to pay more. At the theoretical level there is no benefit to eliminating corporate taxes. If we want lower taxes we have to cut spending.

So far the candidates have been squirrely on this issue. McCaine seems to be more upfront acknowledging this need. Obama on the other hand gave a misleading answer. Obama said that we can just blindly cut taxes, we must be selective, for example we need to increase some program, such as child care!!!!! So he didn't even answer the question placed to him.

Time to watch the debate.

As a very simplistic explanation, if you reduce taxes on business that means the consumer has to pay more. At the theoretical level there is no benefit to eliminating corporate taxes. If we want lower taxes we have to cut spending.

Prices are determined by supply and demand. A business tax reduction would not cause prices to consumers to increase. On the contrary, to the extent that lower business taxes stimulated investment in R&D, plant and equipment, and other areas, prices might well fall in response to increased supplies of goods and services, not to mention new ones. Quality of goods and services would probably increase as well, which is tantamount to a price reduction.

Reduced business taxes would stimulate the economy. They would also cause stock prices to rise. If you don't believe it, go to valuepro.net, key in a stock price and see the calculation of its fair value. Then key in a higher tax rate to the left. Notice the new stock price is lower. If you key in a lower tax rate, the stock price will be higher. This agrees with both economic theory and common sense.

If we want lower taxes, cut taxes.

Regardless of the explanation, history shows that businesses increase prices when taxes increase. How is it possible that they increase prices when taxes go down? Essentially, businesses increase prices whether taxes go up or down? That makes no sense to me.

Bill, you have correctly pointed out that I screwed-up. I will have to have my spin doctor fix the situation. I was trying to finish before the start of the debate so I did not properly review what I wrote.

Here is what I should have said. It is true that if a business does not have to pay taxes it can offer its products at a lower price. However, this transfers the tax burden to the consumer. If the consumer has to pay the taxes they then have less money to spend on the products offered. The net effect is that it does not matter who pays the taxes in the situation where we have a balanced budget. (PS there are some problems with what I am saying based on a global economy where the consumer is not in the US and would not pay a US tax.)

I may be out on a limb here, but I would advocate that it is the consumer who should be freed of paying taxes. The purpose of business is to sell to the consumer. It is the consumer's dollar that is the vote which determines which products will succeed and which will fail. This would force companies to recognize taxes as part of the cost of selling products. Inappropriate tax break have had adverse effects on the economy, such as the overbuilding of houses. If a product is uneconomic - too bad - the product goes out of production.

Taxes should also be viewed as cost of doing business, just like advertising. Furthermore taxes provide corporations with benefits that facilitate the operation of their business such as, such as schools, roads, sewer, water, etc. Corporations should not be allowed to externalize (socialize) costs, such as taxes, to the public for the benefits that they derive.

I will admit, that many taxes are unnecessary and are counter productive to the economy. These are the taxes that should be eliminated. For example, collecting taxes to subsidize home ownership or which redistribute wealth. Our tax system is a mess because it has all sorts of special tweaks in the name of fairness. Unfortunately, this misplaced zeal for fairness ends up being an administrative nightmare because it is simply impossible to be fair to every special interest group.

Thanks again for your comment.

Taxes are supposed to be payment by the beneficiary in proportion to the benefit they have received from a stable, secure, and conducive operating environment (hopefully cost effectively provided).

All individuals and corporations that receive benefit should pay for it, and it seems reasonable to infer a relationship between prosperity and benefit. The more you are in need of security, the more you are in benefit from it.

I suspect that some taxes such as VAT/Sales tax probably have an excessive monetary cost (administration, collection) than an equivalent earnings/turnover tax, but that politics makes more acceptable.

Taxes should also be viewed as cost of doing business, just like advertising. Furthermore taxes provide corporations with benefits that facilitate the operation of their business such as, such as schools, roads, sewer, water, etc. Corporations should not be allowed to externalize (socialize) costs, such as taxes, to the public for the benefits that they derive.

Taxes are a cost of doing business, just like the bribes oil companies pay to heads of petro states, etc., but (1) they wouldn't exist in a truly free market, as there would be no state, and (2) they are immoral and criminal, unlike advertising. Taxes don't provide benefits. Schools, etc. can be provided on the market at lower cost and without the political interference of the State, a giant criminal organization that makes the mafia and Murder Inc. look like choir boys. Government-run schools are more like prisons anyway, where they teach kids to salute the flag and say the socialist pledge of allegiance to the Battle Flag of the United States. Corporations externalize some costs; and taxes raise the cost of doing business, but it's simplistic and wrong to say they externalize taxes, because, as Rothbard pointed out in Power and Market (the best book ever written on the economics of government), the return to factors of production is reduced by taxes on business. One solution to the external cost problem is to privatize the courts and justice system, and actually define and enforce property rights, which governments don't do well. See Rothbard's 1981 Cato J. article on air pollution. A lot of people who are ignorant of economics think businesses simply raise prices 1 for 1 to reflect their higher tax burden when their taxes go up. Rothbard pointed out the absurdity of this idea in great detail.

Refocusing on the bailout, here is a New York Times Article "What an Arrow Shaft Has to Do With a $700 Billion Rescue Plan." Seems that our politicians can't do anything without throwing in some "sweeteners", sorry "pork".

What is somewhat ludicrous, the lawmakers have quickly put together this "fix" including the addition of pork and with big fanfare claim the taxpayers won't be hurt. In the background noise the Alternative Minimum Tax (AMT) issue still lurks. The reporters at CNBC have asked some of the politicians who have worked on the bailout about the tax unfairness of the AMT. The politicians responded with the usual "yes the AMT is unfair and we are working on it". I believe they have been working on it for over 10 years!!!! Obviously, the politicians, who supposedly care about the taxpayer don't really care if they can't, in 10+ years, fix a simple tax inequity.