During class tomorrow, we will (among other things) explore the risk incentive effects of a ?use it or lose it? tax policy; basically, we?ll discover that such a tax scheme (which basically endows the government with a fractional position in a call option on the firm) discourages risk taking.
Of course, as the famous passage from the book of Ecclesiastes reminds us (specifically, in Chapter 1, verse 9), ?What has been will be again, what has been done will be done again; there is nothing new under the sun?. The following quote is taken from a book published in 1946 by economist Henry Hazlitt, entitled ?Economics in One Lesson?.? The quote provides a nice synopsis of much of what we will discuss in class tomorrow.
?When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only 60 cents of every dollar it gains, and when it cannot offset its years of losses against its years of gains, or cannot do so adequately, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. . . .
There is a similar effect when personal incomes are taxed 50, 60, 75 and 90 per cent. People begin to ask themselves why they should work six, eight or ten months of the entire year for the government, and only six, four or two months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a dime of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.?
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