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We really shouldn’t be taxing companies at all

Summary:
Current political philosophy is that companies should be taxed and then given tax breaks on things that politicians would like companies to do. This makes sense to politicians. A better suggestion might well be just not to tax corporates in the first place. There exists a large set of well-identified studies demonstrating that targeted R&D tax policies – such as R&D tax credits, deduction possibilities or subsidies – indeed increase firms’ R&D activitiesTax something, you get less of it. Tax privilege something you get more of it. This is not a great surprise. But now comes the next question:In contrast to this large literature, little is known about the possible disincentive effects of general profit taxes, which – unlike R&D tax credits – are in place in almost every country. From a

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Current political philosophy is that companies should be taxed and then given tax breaks on things that politicians would like companies to do. This makes sense to politicians. A better suggestion might well be just not to tax corporates in the first place.

There exists a large set of well-identified studies demonstrating that targeted R&D tax policies – such as R&D tax credits, deduction possibilities or subsidies – indeed increase firms’ R&D activities

Tax something, you get less of it. Tax privilege something you get more of it. This is not a great surprise. But now comes the next question:

In contrast to this large literature, little is known about the possible disincentive effects of general profit taxes, which – unlike R&D tax credits – are in place in almost every country. From a theoretical perspective, general profit taxes should have sizeable disincentive effects on innovative activity, as higher taxes reduce the after-tax returns on investment. Due to differences in deduction possibilities, this is particularly true when investments are financed via equity rather than debt – which frequently applies to R&D projects because investments carry high risks and lack collateral.

The answer is yes. So, logically, the thing to do is not to tax corporations in order to increase the amount of R&D that is done.

Politicians won’t like this because it would lessen their power over what sort of R&D gets done. Taxing then privileging does direct, of course, to be able to direct is power and why does anyone go into politics if not for power?

Which is exactly why the rest of us should like the idea of not taxing corporations of course.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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