Assuming that corporations maximize profits, that investors maximize the return to their investments, and that the supply of savings is not perfectly inelastic, in the long run a corporate income tax will:

Question

Quizplus · Accepted Answer

If corporations are faced with a tax on their income, they will have less after-tax profits available to pay out as dividends or invest in capital. This lower investment leads to a reduction in demand for loanable funds and lower investment in the economy. The reduced investment, in turn, will lead to less capital accumulation, ultimately lowering the productivity of labor and wages. Therefore, both (b) and (c) are correct. However, it is unlikely that the corporate tax will prevent investment markets from achieving efficiency in the long run since investors may respond to lower profits from corporate taxes by investing in non-corporate forms of business or in other countries where taxes are lower.

Assuming That Corporations Maximize Profits, That Investors Maximize the Return