Question

Multiple Choice

Envision a situation in which the federal government decides that corporations don't pay enough taxes (even though the U.S. corporate tax rate is 38% - the highest in the world). Also, at the same time, elected officials feel that voters will always fall for the class warfare argument that greedy corporations have too much money, so the government should take some money from the successful businesses and give it to the poor. (As W.C. Fields used to say, "Which poor? Uspoor.") In any event, the government decides to raise the corporate tax rate to 50%. Now, this is not a political question. Think. Given what you now know about economics, particularly supply and demand theory, how would basic economics analyze this issue? A. This is not really a subject which macroeconomics can address. B. Taxes provide money directly to the poor. Thus, their standard of living will improve to at least a middle-class level, while the extra money being taken from the corporate officers will reduce their incomes to what the government decides is an acceptable level for them. C. A corporate tax rate of 50% is still much too low, because Bernie Sanders says truly) that he will raise the personal tax rate to 92%. D. The increased taxes are an increased cost to the corporations, which they will normally have to pass on to you, so you pay anyway. Either way, increased costs of production result directly in less supply, which results in higher prices. As prices go up, quantity demanded will be less. These factors are definite results. In addition, it is very likely that unemployment will increase as a result of the decreased demand. Aggregate income thus will decrease, so the end result may very well be that the government gets less total dollars of tax revenue in the aggregate. A problem with analyzing government effectiveness is that there is not a standard measuring tool. With private businesses, it's pretty easy. Why is it much harder to analyze the effectiveness of a government agency compared to the same analysis for a private business? a) Businesses have a simple standard of measurement - profit or loss. The average person has no way of knowing how well a government agency does, because there is no standard of measurement known to the average person. b) We don't need to know how well a government agency does, because it's not really any of our business. The people in Washington are smarter than us, and they'll make the right decisions. c) It's harder because the methods to measure successful outcomes of a government entity are detailed in a 26,000-page government regulation (USC 203.557), in which nothing is listed in alphabetical order. d) Government agencies are so well-run that it's difficult to recognize their shortcomings when there are so very few shortcomings. Businesses, on the other hand, make so many mistakes that they're easier to point out.

Answer 1

1 - Option D

The increased taxes are the increased cost to the corporations and these cost will be passed on to the ultimate consumers in the form of reduced supply and higher prices. Hence this will be the effect of the tax raise on the corporations.

2 - Option A

Businesses have the simple standard of measurement profit or loss. The average person has no ability of knowing how well the government agency does because there is no standard of measurement known to average person.