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There is a lot of science in economics, but where it becomes unscientific is when humans are involved. Much early macroeconomics made the simplifying assumption

by jdswain 14y ago

There is a lot of science in economics, but where it becomes unscientific is when humans are involved. Much early macroeconomics made the simplifying assumption that humans made rational decisions, and that they had perfect information when making these decisions. That is useful for some models, but the real world is much more complex than that, and that is why the models often don't reflect reality. There is a lot of science in economics though. If the business tax rate is different to the individual tax rate then this creates some distortions, but more importantly there is the issue of double taxation. In New Zealand dividends/drawings are treated as tax paid, i.e. the business has already paid tax on this income, so no further tax is due. In UK, and I think USA, the individual would be taxed again, hence there is a double taxation on business profits, which does seem kind of unfair.

rayiner 14y ago
It's not double taxation. Income tax is by it's nature a transaction tax: income is taxed when money changes hands. But that income is counted as income each time it changes hands, so that's not "double taxation." Say we have an economy with just you and me. I make $100. I'm taxed $20 (20%). I give you $80. You're taxed $16 (20%). Total income = $180. Total taxes paid = $36 (20% of $180). The mistake is assuming that the corporation's money is the shareholder's money the minute the corporation makes it, i.e. that the corporation is a mere proxy for the shareholder. It's not. The corporation is a separate person. If the corporation incurs a liability (say one of its trucks runs someone over), it's not automatically the shareholder's liability, again because the corporation is a separate person. A dividend payment is no different than the payment between you and me in the example above. It's not "double taxed"--it's taxed each time it is counted as income, the same as every other payment. There is a deep symmetry here between how income is treated between separate entities and how it is taxed between separate entities. Say we have a married couple. The husband stays at home and does housework, and the wife gives him a $1,000 a week allowance. If they divorce, but the husband still does the housework in return for $1,000, then GDP (i.e. the sum of national incomes) goes up by $1,000. This is the nature of the GDP calculation--when you break apart an internal transaction and make it a market transaction, GDP goes up without anything else changing. Taxation precisely mirrors this. The husband doesn't pay taxes on his $1,000 while he is married and part of the same taxable entity. It's not income to him. But if they divorce, it becomes income to him. GDP goes up and taxes go up by the same proportion.
justincormack 14y ago
Can you point me at the bit of economics that does not involve humans?
- oelewapperke 14y ago
  apple's future US factories ?
artsrc 14y ago
In the US companies generally arrange to pay their shareholders with capital gains through a combination of share buy backs and stock splits. This enables investors to take income when they want to in a very tax concessional way.

by jdswain 14y ago

rayiner 14y ago

It's not double taxation. Income tax is by it's nature a transaction tax: income is taxed when money changes hands. But that income is counted as income each time it changes hands, so that's not "double taxation." Say we have an economy with just you and me. I make $100. I'm taxed $20 (20%). I give you $80. You're taxed $16 (20%). Total income = $180. Total taxes paid = $36 (20% of $180). The mistake is assuming that the corporation's money is the shareholder's money the minute the corporation makes it, i.e. that the corporation is a mere proxy for the shareholder. It's not. The corporation is a separate person. If the corporation incurs a liability (say one of its trucks runs someone over), it's not automatically the shareholder's liability, again because the corporation is a separate person. A dividend payment is no different than the payment between you and me in the example above. It's not "double taxed"--it's taxed each time it is counted as income, the same as every other payment. There is a deep symmetry here between how income is treated between separate entities and how it is taxed between separate entities. Say we have a married couple. The husband stays at home and does housework, and the wife gives him a $1,000 a week allowance. If they divorce, but the husband still does the housework in return for $1,000, then GDP (i.e. the sum of national incomes) goes up by $1,000. This is the nature of the GDP calculation--when you break apart an internal transaction and make it a market transaction, GDP goes up without anything else changing. Taxation precisely mirrors this. The husband doesn't pay taxes on his $1,000 while he is married and part of the same taxable entity. It's not income to him. But if they divorce, it becomes income to him. GDP goes up and taxes go up by the same proportion.

justincormack 14y ago

Can you point me at the bit of economics that does not involve humans?

oelewapperke 14y ago
apple's future US factories ?

artsrc 14y ago

In the US companies generally arrange to pay their shareholders with capital gains through a combination of share buy backs and stock splits. This enables investors to take income when they want to in a very tax concessional way.