Economic Paradoxes
Economic Paradoxes
Reveals the mutually contradictory nature of economic theories
The generally accepted economic theory is laden with two paradoxes.
Consumer spending is said to be the force driving the economy of a nation. Investor confidence is also considered to be essential for the health of an economy so much that Capital Gains tax rate is lower than that on other types of incomes. Now, an investor is somebody who invests funds that became available due to non-consumption of a part of hisr (his or her) income. Thus the investor does hurt the economy by refraining from consuming. Why should hse (he or she) be helped? Obviously, investment is a necessity that cannot be ignored. But the extent of incentives to be given to encourage investment is questionable. It may be best to leave consumption as well as investment alone without any specific encouragement or deterrence so as not to support one at the cost of the other.
It is widely assumed and believed that free markets generate competition resulting into lower prices benefiting the consumer. It is also accepted that the goal of each business organization should be to maximize its profits. These two are mutually contradictory processes. Truly competitive businesses cannot operate at high profits, let alone maximum profits, unless one or more of them are violating the laws and are cheating on their transactions.
The wide variation among prices charged for the same make and model of products by different vendors indicates that they are not based on competition. The prices are set based on whatever the market bears. And there do exist different market segments consisting of groups of people with different idiosyncrasies. Some persons are willing to pay higher prices in return for real or imaginary superiority of the vendor. Some others do not have the access and information to seek the lowest possible prices. These consumers are deprived of the benefit of competition.
The need to curtail profits cannot be overemphasized. The notion that it is all right for business organizations to maximize their profits must therefore be abandoned. Profit is not a dirty concept but profiteering is certainly a despicable practice. It must be realized that exorbitant profits work against the consumers at large in many ways. First they result in unreasonably higher prices even if the buyers are willing and able to pay. Secondly, they fuel inflation. Thirdly they cannot be earned without cheating by the business in some way or the other. It would be naive to believe that high profits can be earned through honest means.
Controlling prices as a means to limit profits is not a practical method. Preferably the tax structure should be used for the purpose. Consider, for example, two businesses that have made the same dollar amount of profit but whose investments were widely different. A firm A, whose investment was larger than another firm B, operated at a lower profit margin and should therefore be charged less tax than B because it provided better service to the national economy.
It is fashionable to argue that the firm B was more efficient and therefore earned a higher rate of return. Efficiency from the point of view of the national economy must to be distinguished from the efficiency from the point of view of the owner and/or investor. The two are not the same and often work against one another. Whereas the owner may want to reward the company for earning high returns, the nation must not. It should be realized that the so called efficiency of a private company is frequently, if not always, the result of its violating laws regarding labor, environment, safety and what not and does not therefore need to be rewarded by the nation.
The rate of corporate income tax should therefore be related to the rate of return of the company. A reasonable rate of return would be about two times the prime rate. Any gross profit rate in excess of this should invite a proportionately higher rate of tax. This way, each company would be encouraged to operate at an optimum rate of profit, failing which it would be made to refund at least a part of its ill gotten profit to the nation as a whole if not to its specific customers.