Effect of “A Bit Less Profit” – Quote of the Day

While I do not agree 100% with what Andrew Mellon talks about in his 1924 book, Taxation: The People’s Business, I do wish more of today’s politicians would read it before they advocate for some of the economic measures they champion, such as higher corporate taxes, higher taxes on the “rich”, sales tax on medical devices, and higher minimum wages to name a few.

This quote of just one sentence comes in the context of a discussion on the effect of the high tax rates at the time on the availability of urban housing.  He discussed how, because of high tax rates, capital was not directed to such projects due to the difficulty in obtaining a return that made the risk of building worthwhile.

We have either the failure to make investment because of the unlikelihood of adequate return, or a gouging of the tenants.

All the issues I mentioned above have the effect of, all things being kept equal, of reducing the profit to the business owner, whether individual or corporation.  Advocates of a higher minimum wage for example often claim that companies can afford to pay the higher wage and make a bit less profit.

What they do not consider is the effect that “bit less profit” will have on the decisions not only of the business, but those who might invest in it.  For the business owner, perhaps it means raising the price of their goods to make up the lost profit or perhaps they delay or abandon plans to expand the business and hire more people.

For investors that “bit less profit” may encourage them to invest in another area that offers better returns.  In the 1920s, and I think today, much capital was for this reason diverted into tax-exempt municipal bonds.  While this might seem wonderful for cities and towns that are struggling to find funds for projects, such activity is unlikely to produce the economic growth a similar investment in the private sector would.

The net result of that “bit less profit” is lower overall economic growth, higher unemployment, and misallocation of capital resulting in not just short-term reductions but long-term as well.