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Taxing Ghosts . . . ?

04/08/2021

With respect to the President’s infrastructure plan, neither my Republican friends nor my Democratic friends can even agree on which things they actually agree on – situation normal – channeling the Gingrich distinction between governing and winning . . . winning wins.  I do part company with my Democratic friends on this issue.

Of course, I laughed when I read the Democratic proposal to fund the repair of our infrastructure by increasing corporate income taxes.  Long-time budget analysts will remember the old joke that new taxes must always be imposed on “not you or me but the guy hiding behind the tree.”

Suppose you’re a company whose electric bills double, triple, quadruple, or whatever.  Unless you raise prices, your income statement will show increased expenses and therefore decreased profit.  Since corporate profits are “the mother’s milk of stock prices,” the value of your shares should decrease . . . at least in the short-term.  This is one way to cool-off an over-heated stock market.  (Cooling-off is different from crashing the stock market.) Since the very wealthy own well over 50% of the stock market, the new corporate income tax falls more heavily on the very wealthy.

However, if you can raise prices, your customers will be paying for the increased taxes.  Poor people spend a higher percentage of their income.  This is called the marginal propensity to consume (MPC).  They also have a lower marginal propensity to save (MPS).  Therefore, poor people will pay a larger percentage of their income on the higher prices.  That is called regressive taxation.  In addition, increasing prices could feed inflationary expectations.

Corporations are neither good or bad.  They are mere legal ghosts – artificial people created by lawyers.  Why not show some honesty by simply increasing income taxes on the very wealthy?  At least they exist!  Of course, taxing corporations instead of human beings is a less apparent way of taxing and is more popular with voters.

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