Economics & Research Blog
Dr. Joe Creates a Fable About Taxes and Investment
By Dr. Joe Webb
Published: July 2, 2010
What if Wal-Mart worked like Congress' and the White House's approach to taxes?
The CEO could declare "we will sell everything at list price because to do otherwise would be to continue to give away revenue that is rightly ours." The finance department, being run under rules just like the Congressional Budget Office would say "based on our historical unit sales, revenues will double under the new plan." Once the Wal-Mart bureaucrats would find that out, they would start putting in budget requests for more of the things they need. "We need new computers!" "We need new desks!" "We're sick of cheap hotels on the road! We deserve to stay at the best resorts! After all, sales are about to double!"
We all know what would happen. Prices would go up, the aisles would be empty, and Wal-Mart's warehouses would be bursting at the seams. "Our customers clearly have stopped spending.... it must be the economy" the executives would declare. "We need to tough this out. Because our credit is so good after all these successful decades, we must borrow money to tide us over until consumers are willing to pay the prices we deserve." So the banks and the markets lend them money. The sales do not come. "The economy is worse than we ever anticipated," they say. "We must downsize accordingly..."
Of course, this is a fable I just made up. Wal-Mart would never do this. They change course when things are not working, and they know that the only reason they exist is because cost reduction, even when through massive investments in backroom technologies like transaction processing, is a compelling consumer magnet and a major competitive advantage, and is ingrained in their culture.
Taxes are a price paid for incremental income. Other prices paid for that incremental income are one's own time, the time of others hired, education & training, and many other items. But incremental/marginal taxes can be the biggest chunk, and the biggest dead weight. Removing that dead weight will shift the emphasis of business from skeptical efficiency to opportunities and the expansion needed to meet them. Taxpayers come to realize when their additional efforts will have a payoff. Now the bigger payoffs come from conservation of effort and risk avoidance, freezing the deliberative risk-taking and investment we need at this time.