Donkeys, like sheep and goats, will eat the grass down and pull the roots out so it can’t grow back. Cows and horses don’t do that; they graze all the way down to ground level, but leave the roots (and, usually, a bit of green), and when Spring rains come there is more grass. Goats don’t really like grass, and will eat the weeds down, which is a good thing. It’s really only sheep and donkeys that destroy their later food supply while satisfying their immediate hunger.

Bad tax policy very often ends up like a donkey grazing. It fills the immediate need but uproots the precursors to further growth, producing revenue in the short term while damaging the economy it feeds from in the long.

Economists at Bank of America Merrill Lynch say one key to a jobs recovery is an improvement in housing — because so much job creation is driven by new businesses that have in recent years been financed in part by home equity borrowing. (Via Instapundit)

An accountant in a piece I read not long ago was amazed and aghast that the United States “double taxes dividends”, that is, charges taxes on corporate profits before they are distributed to stockholders. What’s amazing is that the accountant quoted is from New Zealand (sorry, I lost the link), where the ideal of governance is European-style Social Democracy, though they don’t call it that.

The way it’s supposed to work is this: People who have assets surplus to their immediate need can turn them over to businesses, who use those resources to amass capital in large enough amounts to produce the means of production. Production satisfies the needs of the populace, who purchase the goods. Profits from those sales flow to the business owners, who use them to augment the means of production. This virtuous cycle contains both positive and negative feedback loops — negative, in that goods and services that do not satisfy the needs of the populace do not return a profit and are thereby discouraged; positive, in that goods and services that do satisfy the needs return profits that go to increase the production of them.

A “corporation” is simply a legal and social structure that facilitates the operation of the cycle. The owners of a corporation are the stockholders — “shareholders” in BritSpeak, and that’s really a better term. Each shareholder owns a share, a portion, of the corporation, and receives a proportional share of the profits. Shareholders acquired their shares by sacrificing their surplus, or “investing”; the returned profits replace that, augmenting the surplus, which can then be used for further investment, which results in more goods and services. Returned profits can also be used for consumption, but that simply widens the distribution of the benefits — consumption, that is, purchasing goods and services, results in profits to businesses other than the specific one represented by the investment, propelling the cycle elsewhere.

Taxes damp the cycle. Taxing profits makes them smaller (well, d’oh) and thus reduces the surplus available for investment. Government needs revenue, and therefore must tax. Shareholders in a corporation are, almost by definition, “rich” — that is, they have assets surplus to their immediate needs. Taxing the rich for revenue makes sense, because they have lots of assets (making the collection efficient), but care must be taken to extract revenue without totally breaking the virtuous cycle of investment — production — profit — investment. Taxing the rich to total destruction breaks the cycle, resulting in reduction or elimination of production and consequent failure to meet the needs of the populace.

Taxing the corporation makes no sense whatever. Profits taxed away are not available to shareholders for further investment, which damps the cycle — and has the further pernicious effect of making shares less attractive to those with surplus, which damps the virtuous cycle even more. Taxing both the corporation and the shareholders is eating the grass to the roots, so the rains produce only mud. The ass has an excuse: it isn’t sapient and cannot be expected to be forethoughtful.

Double taxation and “soaking the rich” have been U. S. tax policy for a long time, and the results are catching up to us. Genuine capital formation — amassing the wherewithal to build the means of production — hasn’t taken place for a long time; business have, instead, gotten their capital by borrowing. The profits of the enterprises have thus flowed not to genuine investors, members of the populace, but to banks who insist, quite properly, that they be repaid. “Shares” are no longer valuable because of the profits they will return from production of goods and services; they have become in reality “stock”, items that have some existential value depending on the ability to sell them later to someone else, making the “stock market” into a frenzied exchange of tulip-bulb futures. Less investment means fewer means of production, which means less production, which means more and more of the needs of the populace are not met — and also means fewer and fewer “rich” to tax, which means less tax revenue.

This, ultimately, is the cause of unemployment. Workers are needed to operate the means of production. If there are no means of production, there is no need for workers. Worker complaints about “offshoring” are correct in essence but mistaken in emphasis — if production is to occur at all it must happen where the means of production are available, so workers are only needed where capital formation (by whatever means) can occur. If tax policy in the United States breaks the investment — production — profit — investment cycle, production and employment will move to where the cycle is permitted. The ass et its fill, and wonders where the green grass went.