Total Posts:3|Showing Posts:1-3
Jump to topic:

Economic Profit Tax

DisKamper
Posts: 63
Add as Friend
Challenge to a Debate
Send a Message
9/3/2015 5:13:22 AM
Posted: 1 year ago
So this idea came from the discussion, "What's wrong with socialism, economically?", but it is not too related to socialism, so I created a new topic. Essentially, the idea here is what would happen if we taxed economic profits (income-expenses-opportunity costs) at a very high tax rate like 95%. Here's an more in-depth explanation:

>Think about the 95% tax as an arbitrage tax: it taxes profit that arises as a result of market inefficiency. Any time I borrow money at a low rate and use it somewhere else where I can get a high rate of return, my profit is taxed. The way this would work with productivity increasing tools like machines is like this: Let's say highest current annual interest rates are 10%. I borrow $1000, then use it to buy a machine that makes stuff. The machine makes $200 by the end of the year. I sell the machine and pay back my loan getting $100 at the end. After the tax I walk away with $5. Note that the person who made the machine still got $1000; the incentives to create tools that increase productivity don't change. Looking at it from a supply-demand perspective, the 95% tax has clearly not changed supply. One might think that demand was reduced, but actually this is not the case because the machines are the still best investment on the market- buying a machine is better than doing anything else with $1000.

My question is, what kinds of problems does such a tax create?
DisKamper
Posts: 63
Add as Friend
Challenge to a Debate
Send a Message
9/4/2015 3:36:36 AM
Posted: 1 year ago
To make this more rigorous, let's say economic profits are estimated by the Economic Value Added formula. This ensures that risk is taken account in the calculation of economic profit.

https://en.wikipedia.org...
Stwop12
Posts: 11
Add as Friend
Challenge to a Debate
Send a Message
9/8/2015 2:37:28 AM
Posted: 1 year ago
If I understood your prompt correctly then you do have an error. You mentioned that a 95% tax on profit would not affect demand for the machines but they would. If the most profit I can make from a machine was five dollars for a years worth of work then why would anyone want to buy the machine. It's not worth the hassle to get the loan and sell the product that the machine is making. As a result of this hassle, no one will pay the manufacturers for this machine which means they have no incentive to continue making them.