Abolish Profits Taxes!

The United States became an economic superpower and leading economy in the world with limited government intervention in its economy. It has maintained the lead during the past century despite significant increased government regulations and intervention, especially through high profits taxes. Profits taxes were raised to very high levels in the 1940’s and 1950’s. Although reduced since then, manufactiuring corporations still pay over 50 percent of their retained earnings to the government. In States like California and New York, profits taxes are the highest in the world and reduce American competitiveness. The U. S. faces significant problems with funding retirement, health care, and education. With a shrinking workforce, adequate funding of these needs is achievable only through strong economic growth. The Obama Administration believes that it can engage is massive deficit spending, fund universal health care, fund many government projects, borrow vast amounts of investment money available to the private sector, and produce good economic growth. But there are no free lunches in economics. Government is only parasitic on the private economy through tax revenue. Adequate funding for expanded government projects can only come from expanded private sector investment and growth. Massive government spending may encourage some increased consumption and temporary nominal growth, but it will not yield the good real economic growth that matters. Economics like nearly everything is a complicated matter and the simplified solutions of Obama and the left to soak the rich and raise taxes to help the poor always have secondary and tertiary effects which usually do more harm than good. They slow down economic growth and make nearly everyone poorer in the long run. They may equalize incomes at the cost of productivity and innovation without changing inequality patterns in wealth. Wealth in Sweden is more unequally distributed than in the U.S. The simplest and easiest move to help everyone is to eliminate profits taxes. Many politicians think that profits taxes are relatively benign because they can be passed on to consumers. But profits taxes have had many adverse consequence for the U.S. economy during the past 75 years. They have reduced investment, slowed economic growth, and caused considerable misallocation of resources and losses of efficiency. They raise industry barriers to entry and competition. They increase industry concentration and produce corporations that dominate industries. Eliminating these problems and stimulating investment and growth by abolishing profits taxes would be very beneficial. The evidence in economics is very complex and it is difficult to demonstrate that an economic claim or principle holds. Theoretical arguments often must be brought to bear. As Keynes asserted, investment must depend on expectations that returns will exceed interest rates. Better profits provide more money to invest and encourage higher expectations of future returns. The evidence supports a strong correspondence between profits, private investment, and economic growth. Environmentalists argue that the goal of economic growth should be abandoned because burning fossil fuels presumably causes climate change and we are presumably running out of resources. But two chapters are devoted to refuting these claims. Evidence is marshalled to show that profits taxes cause resources to be shifted to inferior uses and cause greater industry concentration and reduced competition. When the effects of the policies supported are considered and not the rhetoric, the Democratic Party is the real party of Big Business. It ensures concentration of power in large corporations just as it promotes increased concentration of power in the Federal Government.