lectur15-page62 - lower dividends Other view Higher...

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Traditional view: a firm currently charging the profit-maximizing price and producing the profit-maximizing output will have no reason to change price or output when a corporate income tax is imposed. The price and output combination yielding the greatest profit before the tax will still be the most profitable after govenrment takes a fixed percentage of the firm’s profits in the form of income taxes. Current Corporate Tax Rates: $10 million and less: 34 percent tax rate over $10 million: 35 percent tax rate The company’s stockholders bear the incidence of the tax in the form of
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Unformatted text preview: lower dividends. Other view: Higher corporate taxes reduce retained earnings that the corp. could use to increase capital and expand production. R&D efforts may be diminished. If a corp. is not currently operating at the profit-max. position, (fear of govt. pressure, adverse public opinion), will use higher corporate taxes as “excuse” or rationale for price increases with less fear of public criticism. 62 Production Taxes and Subsidies Increased corporate income taxes may result in a decrease in supply and thus higher consumer prices....
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