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… is from page 157 of the late, great Harold Demsetz’s richly rewarding 2008 book, From Economic Man to Economic System [2]:
A tax levied on corporate profits reduces the care and effort owners will put into its operation, since part of the return that would have been received by owners will go to the state. De facto, 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 the corporate tax rate, the greater the incentive for corporate owners and managers to pursue the “quiet life.”
DBx: Someone might pick a nit by insisting that, if some of the tax revenues extracted from the corporation are used to build infrastructure, to subsidize genuine education, to supply an honest court system and effective law enforcement, or even to pay customs officers who shield a corporation from foreign rivals, then the state does indeed provide effort to improve the firm’s return. Yes.
But almost none of the tax revenues are so earmarked. Many of these revenues are used in ways that are either not at all helpful to the firm from which they are extracted, or are positively harmful to the firm – such as, for example, when the tax revenues are used to fund customs officials who obstruct the firm’s access to lower-cost or higher-quality inputs supplied by foreign sellers. Realistically – and even if the state were to use every cent of the tax revenues in socially valuable ways – the value that the firm derives from the use of tax revenues extracted from it is generally much less than is the value that those funds would have produced for the firm had they not been taxed away.
Suppose that a thief each month steals $1,000 from the mom’n’pop store that you own and operate. Suppose further that this thief then, each month, spends $100 in ways that produce some positive value for your firm, and spends the remaining $900 doing magnificently wonderful charitable works all across the town, but works that yield to your firm no value. Under these circumstances, the thief is effectively a shirking partner – a partner who gets from your firm more in value than he or she contributes to it.