Wednesday, June 15, 2011

The "State" Represents itself as the Shirking Partner in the form of Tax

‘A tax levied on corporate profit reduces the care and effort owners put into its operation, since part of the return that would have been received by owners will go to the state. Defacto, private owners of the corporation are saddled with a shirking partner, the state, which takes part of the revenue and provides none of the effort to improve the firm’s return. Consequently the greater is the corporate tax rate, the greater the incentive for corporate owners and management to pursue the “quiet life”.’ - Harold Demsetz’s, From Economic Man to Economic System, Chapter 10, pages 141 -159, The Public Corporation: Its Ownership and Control.
In essence, the state represents itself as the shirking partner in the form of tax. Since firms are merely a collection of households, both the firm and accompanying households are saddled with shirking partner which takes part of the revenue and provides none of the effort.
Its worth considering Demsetz's proposition before one deliberates what the shirking partner does with the revenue taken. That is, decouple the two propositions of state through tax acting as a shirking partner -from- what the shirking partner ultimately does with the revenue taken.
Tax certainly is a disincentive. However, "disincentive" is rather abstract until you place the face upon disincentive as the shirking partner. That the disincentive in fact is the shirking partner providing zero effort yet taking revenue. If one was saddled with a shirking partner other than state, would one continue with such a partner?
The second item is what does the shirking partner, that provided zero effort yet took revenue, do with such revenue? What if the shirking partner took the revenue and created more disincentives in the form of regulation (another form of tax). Not necessary regulation associated with the minimal state, rather regulation associated with the ever expanding state. What if the shirking partner paid its subordinates high wages? What if the shirking partner took the revenue and enriched itself and its subordinates in the form of benefit plans and retirement plans? What if the shirking partner redistributed the revenue to those that suffer no tax (no shirking partner)?
Its no wonder James and Jane Goodfellow have such a low opinion of "state". What opinion other than a negative opinion could one possibly have regarding a shirking partner providing no effort yet taking revenue, then taking such revenue to create more tax, enrich itself, and redistribute "efforts"?

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