A tax on accounting profits in an industry

Question

Quizplus · Accepted Answer

A tax on accounting profits doesn't directly affect the efficiency of production unless it significantly alters the behavior of firms in terms of their production decisions. When economic profits are low, a tax on accounting profits can exacerbate inefficiencies by reducing the resources available for investment or by pushing firms to operate in less efficient ways to minimize their tax burden. High economic profits suggest that firms are already operating efficiently to maximize those profits, so a tax on accounting profits is less likely to lead to additional inefficiencies in that scenario. The Marginal Revenue Product (MRP) curves for both nonfixed and fixed factors are determined by the productivity of those factors and the market demand for the product, not directly by taxes on profits.

A Tax on Accounting Profits in an Industry