Tuesday, May 09, 2006

Tax is destructive

Having high taxes distorts economic behaviour and changes peoples priorities and goals. Well, not really their goals. Most firms and individuals have the goal of maximising profit, but once you introduce a highly regulated and high taxing labour market, the methods of acheiving this are corrupted.

Ideally, firms would compete to secure the highest profits. They would concentrate on a range of factors that contribute to this in a free market; i.e the quality of their products, their marketting, image, pricing, reputation and most importantly - how they stack up against the competition. But when you introduce tax into the equation, a main consideration becomes "how do we minimise the tax we pay?"

And here we come along the subject of "deductions". You see the tax on businesses can be oppressive, especially given that businesses have business-related expenditure to sustain such as furniture, offices, wages, software and computers. So these businesses then rely on the governments tax legislation to see what the after-tax cost of these expenses are in order to fully evaluate them. And this distorts behaviour in a harmful way, as highlighted by the Mises institute:

Even the shape of your office is influenced by intervention. Thirty years ago, offices started using cubicles to house workers. Cubicles are still the largest selling office furniture, despite a huge range of management experts who say that they create a bad business environment. Why do they persist?
In 1968, the Treasury Department created new depreciation schedules that subsidize cubicles at the expense of separate offices. Companies can depreciate office furniture (including cubicle walls) in 7 years, whereas permanent office structures are given a 39.5-year rate. In other words, the costs of cubicles are more quickly recoverable than offices. This one change alone is what turned our workplaces into pictures out of Brave New World instead of the comfortable and humane places that they should be.